US treasury yields fell after the macro data showed that the US economy grew at a slower-than-expected 2.1% pace from the first quarter. Analysts had expected a gain of 2.4% in the second quarter. Gold prices rose (+1.95%) for the second week in a row as investors bet the Federal Reserve won't tighten monetary policy again. The yield on the 10-year Treasury notes eased to 4.18% (down 5 basis points), while the 2-year yield closed 20 basis points lower at 4.88%. Yet the Federal Reserve continued to reduce the size of its balance sheet by almost $18 billion over the week ended August 30, 2023. It shrank by $85 billion in August.
In Europe, the German 10-year Bund yield treaded water at 2.55% (-1 bp). Germany is poised to be the sole major economy facing contraction this year. In August, business activity in the country experienced its most rapid decline in over three years, coupled with a deteriorating business sentiment. The July industrial orders and production data in the coming week could further strengthen this perspective, providing support for the argument that the ECB should maintain its current interest rates in September.
Investment grade corporate bonds gained momentum against this backdrop. In Europe, the IBOXX € Liquid Corporates index edged up 0.25%. In the US, the IBOXX $ Domestic Corporates index gained 1.09%.
High yield bonds followed suit, with a gain of 0.36% in Europe (IBOXX € Liquid High Yield Index) and 1.03% in the US (Markit iBoxx USD Liquid High Yield Capped Index). Emerging debt in local currencies added 0.27%. The dollar index edged up 0.10% above 104.25.