Treasury Yields Drop Amid Concerns Trade Disputes Will Slow Economic Growth

A government report released on Friday showed that economic growth jumped in the second quarter at its fastest pace in nearly four years. According to the Department of Commerce, U.S. Gross Domestic Product rose 4.1 percent, its best pace since the third quarter of 2014 and the third-best growth rate since the Great Recession. The GDP number matched expectations from economists and was supported by an increase in consumer spending, exports and business investment.

In other economic news, U.S. consumer sentiment declined in July according to the University of Michigan. The index fell to 97.9 from 98.2 in June, as both the assessment of current economic conditions and expectations fell. Economists had forecast a 97.3 reading.

U.S. Treasury Markets

Despite the strong growth in the economy, which should have raised expectations for additional rate hikes by the Fed later in the year, U.S. Treasury yields fell on Friday as investors questioned whether the high growth rates will be sustainable especially in light of historically low levels of unemployment.

Investors followed in line with the thinking of U.S. Federal Reserve officials who are less certain GDP can remain above 4 percent. The central bankers forecast GDP to rise 2.8 percent for all of 2018 but then to tail off to 2.4 percent in 2019 and 2 percent in 2020.

The yield on 10-year Treasury note settled at 2.958, down 0.017, while the yield on the 30-year Treasury bond settled at 3.085, down 0.016.

U.S. Equity Markets

The major U.S. stock indexes finished lower across the board on Friday. Investors set aside the robust GDP report, choosing instead to focus on earnings.

In the cash market, the benchmark S&P 500 Index settled at 2818.82, down 0.7 percent. The blue chip Dow Jones Industrial Average closed at 25451.06, down 0.30% and the tech-driven NASDAQ Composite finished 1.49% lower at 7736.98.

Technology stock earnings continued to remain in focus. Contributing the most to the decline in the NASDAQ Composite were an 8.5 percent decline in shares of Intel, and 20 percent loss in shares of Twitter.

At the end of the week with over 50 percent of S&P 500 companies reporting earnings, 79.8 percent have reported better-than-expected earnings, according to data from FactSet.

U.S. Dollar

The U.S. Dollar fell against a basket of currencies on Friday, helped by the decline in U.S. Treasury yields. The drop in yields was in response to concerns that current GDP growth is unsustainable as lingering trade tensions are likely to be a drag on the economy in the second half of 2018.

The Euro finished slightly higher against the dollar following its steepest one-day loss in a month in reaction to the European Central Bank on Thursday reaffirming its plan to slowly end its accommodative monetary policy.