TREASURIES-Yields gyrate lower, investors mull weak GDP and stagflation scenario

By Alden Bentley

NEW YORK, April 30 (Reuters) - Benchmark U.S. Treasury yields seesawed lower on Wednesday after a disappointing read on first-quarter U.S. growth underscored market reasoning that White House tariff uncertainty will both weaken growth and increase inflation in a dreaded "stagflation" scenario.

Gross domestic product decreased at a 0.3% annualized rate last quarter, the Commerce Department said in its advance estimate, much weaker than the 0.3% growth rate forecast by economists polled by Reuters, and the 2.4% growth from the October-December period.

The growth contraction was attributed in part to a deluge of goods imported by business to front run any cost increases from President Donald Trump's on-again, off-again tariff plans.

Moreover, the survey was concluded before data on Tuesday showed the goods trade deficit surged to an all-time high in March amid record imports, which brought downgrades of GDP estimates.

At the same time the GDP deflator, a proxy for inflation, was 3.7%, higher than the prior quarter's 2.3% and the expected 3.0%.

Lou Brien, market strategist at DRW Trading in Chicago, said it looked like real final sales were the weakest since the pandemic, and before that since 2009, which may have initially supported bonds before traders dug into the inflation components and got out again to lift yields.

But that was also short-lived as Wall Street opened sharply lower in a risk-off mood that encompassed the bond market on the back of the first official economic hit from Trump's trade policies.

"Reconsidering, they probably looked over to the inflation measures, the GDP deflator and the PCE core, both significantly higher than anticipated. And so there was a little bit of a push me pull you on the bond market," Brien said.

In the first quarter, the Personal Consumption Expenditures Price Index rose 3.6% compared with a 2.4% rise in the fourth quarter of last year, the GDP data showed. The core reading, excluding food and energy, rose 3.5% after a 2.6% rise.

Separate data showed the PCE index, tracked by the Federal Reserve for its 2% inflation target, was up 2.3% in March.

Earlier, yields ticked lower after the release of the ADP National Employment report showing 62,000 new private sector jobs in April, fewer than the previous month's downwardly revised 147,000.

ADP, along with Tuesday's Job Openings and Labor Turnover Survey (JOLTS) serve as runway indicators to Friday's April payrolls report, likely to be the biggest news event of the week.

"To get the stagflation of the late '70s and early '80s would require much higher unemployment and inflation, so this is more of an aroma of stagflation than an actual stench of stagflation," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

Traders pulled back slightly from bets the Fed will cut interest rates by a full percentage point this year after the GDP report. Still, futures contracts that settle to the Fed's policy rate continued to point to a start of easing in June, with a total of four quarter-point reductions likely, bringing the rate to the 3.25%-3.5% range by year-end.

While it was quiet this week on the Treasury issuance front, the Treasury Department said it expects to keep its coupon and floating-rate note auction sizes steady for at least the next several quarters and will study potential changes to its buyback program to support market liquidity.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was off 0.4 basis point from late Tuesday at 4.17%. The yield on the 30-year bond US30YT=TWEB rose 1.5 bp to 4.663%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 54.5 basis points, steeper than late Tuesday's +52 bp.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, was 3.7 bp lower at 3.621%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.301% after closing at 2.292%.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.228%, indicating the market sees inflation averaging about 2.2% a year for the next decade.