* U.S. Q1 GDP comes out weaker than expected
* U.S. core PCE, an inflation gauge, is at 2 percent
* U.S. labor costs rise in Q1
* June rate hike chances rise after GDP data
(Adds comment, byline, table; updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, April 28 U.S. Treasury debt yields
rose across the board on Friday after data showed the U.S.
economy in the first quarter grew at its slowest pace in three
years, but details of the report suggested a more upbeat
Yields, which move inversely to prices, touched session
highs immediately after the report. Some analysts suggested that
investors were probably positioned for a much weaker number in
line with the Atlanta Federal Reserve's forecast for growth of
just 0.2 percent.
Data showed on Friday that U.S. gross domestic product grew
at a 0.7 percent annual rate, the weakest performance since the
first quarter of 2014.
But there were positive elements. For instance, the core
inflation measure, the PCE index, was 2 percent, compared with
1.3 percent in the fourth quarter. The headline PCE deflator
also rose, up 2.4 percent. All these figures suggested a
build-up in inflation, which should keep the Fed on track to
raise rates at least twice this year.
Indeed, rate futures have priced in a 71 percent probability
of a Fed policy tightening in June after the GDP data, up from
about 68 percent before the report's release.
Elsewhere, first-quarter employment costs rose to 0.8
percent, higher than market expectations, an indication of
rising wage growth.
"Everything continues to point to continued acceleration in
wage growth," said Brett Ewing, chief market strategist, at
First Franklin Financial Services in Tallahasee, Florida.
"The weak (GDP) number is more likely a pause than a
continued slowdown.. Odds should rise to a near certainty for
June. They simply cannot hold off into such strong labor
numbers," he added.
In late morning trading, benchmark 10-year notes
were down 3/32 in price to yield 2.307 percent, up from 2.296
percent late on Thursday. Yields earlier hit session highs of
U.S. 30-year bond prices fell 10/32, yielding
2.980 percent, up from Thursday's 2.965 percent.
On the front end of the curve, U.S. two-year yields were at
1.269 percent, up from Thursday's 1.258 percent.
Jim O'Sullivan, chief U.S. economist, at High Frequency
Economics believes GDP in the second quarter should be much
higher, going by the fact that growth has tended to be
below-trend in the first quarters of the last seven years.
He said real U.S. growth has averaged just 1.0 percent
annual rate in first quarters, well below the 2.5 percent for
the second quarter, 2.5 percent for the third, and 2.3 percent
for the fourth.
(Editing by Bernadette Baum)