* U.S. economy grew by 4.1 pct in second quarter
* Yield curve flattens as inflation disappoints
By Karen Brettell
NEW YORK, July 27 (Reuters) - U.S. Treasury yields retreated from six-week highs on Friday after data showed the U.S. economy grew at its fastest pace in nearly four years, but came in below high expectations for the number.
The U.S. economy grew as consumers boosted spending and farmers rushed shipments of soybeans to China to beat retaliatory trade tariffs before they took effect in early July.
Gross domestic product increased at a 4.1 percent annualized rate also as government spending picked up, the Commerce Department said in its snapshot of second-quarter GDP on Friday. It was strongest performance since the third quarter of 2014.
“The headline number was a little bit below consensus and perhaps a little below what the market was pricing in,” said Jonathan Cohn, an interest rate strategist at Credit Suisse in New York.
Economists had expected the economy would grow by 4.2 percent.
The yield curve also flattened as the report showed benign inflation.
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, increased at a 2.0 percent rate in the second quarter after rising at a 2.2 percent pace in the January-March period.
“You had strong growth numbers but inflation did disappoint on the weak side. ... I’d say that’s one of the key drivers behind the flattening,” said Cohn.
Benchmark 10-year notes gained 6/32 in price to yield 2.954 percent, down from a high of 2.988 percent reached in overnight trading, which was the highest since June 13.
The yield curve between 2-year and 10-year notes flattened to 28 basis points from 30 basis points before the data.
Investors are next focused on the Bank of Japan’s meeting next week for signs of how or when it may alter its massive stimulus.
Yields have risen and the yield curve has steepened since a Reuters report on July 20 that the Japanese central bank was discussing modifying its easing program. (Reporting by Karen Brettell; editing by Jonathan Oatis) )