US bond yields fell from a high level on Thursday. Data released on the same day showed that US economic growth in the first quarter was slower than previously estimated, and consumer spending was lowered. This gave the Federal Reserve more room to cut interest rates this year, thus temporarily relieving the sell-off pressure faced by the bond market recently.

According to market data, US bond yields from 2-year to 30-year terms both recorded their biggest one-day decline in two weeks on Thursday. By the end of the New York session, US Treasury yields had fallen across the board. Among them, 2-year US Treasury yields fell 4.8 basis points to 4.933%, 5-year US Treasury yields fell 6.9 basis points to 4.57%, 10-year US Treasury yields fell 6.8 basis points to 4.549%, and 30-year US Treasury yields fell 5.8 basis points to 4.678%.

On Wednesday, multi-term US bond yields hit a four-week high, as treasury bond sales for two consecutive trading days this week were weaker than expected, raising concerns in the market that the large supply of debt is affecting investor demand.

However, before and after the latest economic data was released on Thursday, this wave of bond market sell-offs eased somewhat. Analysts say the increase in yield over the past few trading days may have been excessive.

According to data from the US Bureau of Economic Analysis on Thursday, the US GDP grew at an annual rate of 1.3% in the first three months of this year, which is lower than the initial value of 1.6%. Personal spending, which is the main engine of the US economy, increased by 2.0%, and the initial value was an increase of 2.5%. In the price sector, the personal consumption expenditure (PCE) price index, an inflation indicator favored by the Federal Reserve, was equivalent to an annual increase of 3.3% in the first quarter, which is slightly lower than the initial value. The core PCE price index, which excludes food and energy, increased by 3.6%, compared to an initial increase of 3.7%.

These data highlight the decline of momentum in the US economy at the beginning of 2024 after continuous unexpected growth in 2023. High interest rates, reduced savings accumulated during the pandemic, and slowing income growth are some of the key factors affecting American households and businesses.

Zachary Griffiths, senior investment level strategist at CreditSights, said, “The revised GDP data is slightly encouraging in terms of personal consumption expenditure: the data has declined slightly, and people did not expect it to weaken further. This will help the Federal Reserve assess how inflation is under control. I think the market is ready for a big rise.”

Other data released on the same day also showed that the US economy and labor market are slowing down. According to the data, contract sales of existing homes in the US recorded the biggest decline in three years in April, and the overall level of home buying activity was also at its lowest level since the COVID-19 outbreak in the spring of 2020. In the week ending May 25, the number of initial jobless claims increased by 3,000, to 219,000 after seasonal adjustments, higher than market expectations.

After the release of GDP, initial jobless claims, and property market data, industry insiders' expectations about the extent of the Federal Reserve's interest rate cut during the year heated up slightly. Traders' latest pricing predicts that the Federal Reserve will cut interest rates by 35 basis points during the year. This figure is slightly higher than the previous day's 31 basis points.

Goldman Sachs is worried that the recent sell-off in the bond market may “dig a hole” for US stocks!

Overall, although US bond yields generally declined markedly overnight, some industry insiders are still quite cautious. Earlier this week, 2-year US bond yields had once returned above the 5% mark, which once again made many Wall Streets sweat about the future of US stocks. On Thursday, the three major US stock indexes fell across the board for the second consecutive trading day, and the Nasdaq Composite Index, which concentrates on technology stocks, fell more than 1%.

Goldman Sachs strategist Peter Oppenheimer said on Thursday that the strong gains in the stock market may subside this year due to rising bond yields and rising US stock valuations.

In an interview, Oppenheimer said, “US bond yields are rising, which limits the current upward space in the stock market, and profit growth of US companies excluding tech giants is also moderate. We think the stock market will basically fall into a sideways state in the next few months.”

The strategist, who said stocks outside the US are more attractive this year, believes that the correlation between US stocks and US Treasury bonds may rise further because yields are currently at a level that “may drag down all asset classes.” In response to whether rising yields would be a punitive effect on the stock market, Oppenheimer said this is absolutely true.

Oppenheimer pointed out that the faster US bond yields rise, the greater the impact on the stock market. Considering the stock's valuation, this would be a market slowing down. He reiterated that investors should seek to diversify geographical and industry risks. Diversification is an opportunity for investors in a relatively calm market environment.

Looking ahead to the day, the Federal Reserve's most popular inflation indicator, the April Core PCE Price Index, will be released tonight, and it is worth paying close attention to by investors. The data may provide more clues as to how the Federal Reserve will cut interest rates later this year.

Eugene Epstein, head of structural products in North America at Moneycorp, said that this data may drive the market trend more than Thursday's revised GDP data.

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