Treasuries Edge Lower After US GDP Logs Fastest Growth in Two Years

US Treasury prices moved modestly lower after fresh economic data showed the American economy growing at its strongest pace in two years, reinforcing the view that interest-rate cuts may remain off the table longer than markets once expected.

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The stronger-than-anticipated GDP figures prompted investors to reassess the outlook for monetary policy, leading to higher yields across the Treasury curve. Short-dated bonds bore the brunt of the move, reflecting sensitivity to changes in expectations around Federal Reserve policy.

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Yields climbed across nearly all maturities, with two-year Treasury notes leading the advance. The yield on the two-year rose by roughly three basis points to around 3.52%, as traders dialed back bets on a more aggressive easing cycle in 2026. Longer-dated bonds also saw yields edge higher, though moves were more muted compared with the front end of the curve.

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The GDP report painted a picture of an economy that continues to show resilience despite elevated borrowing costs. Consumer spending remained a key driver of growth, supported by steady job gains and wage growth. Business investment also contributed positively, suggesting companies are still willing to deploy capital even as financing conditions remain relatively tight.

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For bond investors, the data reinforced concerns that the Federal Reserve may have less urgency to pivot toward rate cuts. While inflation has cooled from its peak, policymakers have repeatedly emphasized the need for sustained evidence that price pressures are firmly under control before easing policy. Strong economic growth complicates that calculus, as it risks reigniting inflationary momentum.

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Market pricing reflected this shift in sentiment. Futures tied to the Fed’s benchmark rate showed reduced expectations for early or aggressive cuts next year. Instead, investors increasingly anticipate a more cautious and gradual approach, with rates staying higher for longer than previously assumed.

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The move higher in yields also rippled through other asset classes. US equities struggled to find direction as higher bond yields weighed on valuations, particularly in interest-rate-sensitive sectors such as technology and real estate. At the same time, the dollar found support, benefiting from the relative strength of the US economy compared with other major regions.

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Despite the near-term pressure on Treasuries, some analysts caution against extrapolating too much from a single data release. While growth has accelerated, forward-looking indicators suggest the economy could still cool in coming quarters as the full impact of past rate hikes continues to filter through. Household savings buffers are shrinking, and credit conditions remain restrictive for some borrowers.

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Still, the latest GDP figures underscore why the bond market remains vulnerable to upside surprises in economic data. Each sign of persistent strength challenges the narrative that rate cuts are imminent, especially if inflation proves sticky. This dynamic has kept volatility elevated in the rates market, with investors reacting swiftly to incoming macroeconomic signals.

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The yield curve remains inverted, a condition historically associated with economic slowdowns, but the degree of inversion has fluctuated as growth data surprise to the upside. The rise in short-term yields reflects confidence that policy rates will stay elevated, while longer-term yields suggest investors still see risks of slower growth down the road.

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For income-focused investors, higher yields may present selective opportunities, particularly in shorter maturities where rates are most attractive. However, duration risk remains a consideration, as unexpected strength in economic data can quickly push yields higher and pressure bond prices.

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Looking ahead, attention will turn to upcoming inflation readings and labor-market data, which will play a critical role in shaping expectations for the Fed’s next moves. Policymakers have made it clear that decisions will be data-dependent, leaving markets highly sensitive to each new release.

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In the meantime, the latest GDP report serves as a reminder that the US economy continues to defy pessimistic forecasts. While that resilience is a positive sign for growth and corporate earnings, it poses challenges for bond investors hoping for swift relief through lower interest rates.

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As 2026 approaches, the path for monetary policy remains uncertain, but one message from the bond market is increasingly clear: strong growth makes a dovish pivot harder to justify.

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