Select Page

The expected strong GDP growth report for the third quarter to be released on Thursday will send the bond market wild again.

The U. S. economy, economists project, grew at the fastest rate in nearly two years in the third quarter. The actual figures from the Bureau of Economic Analysis get released before the market opens on Thursday, October 26. Gross domestic product grew at a 4.3% annualized pace in the quarter, according to the median projection from a Bloomberg survey of economists.

The driver is once again expected to be the U.S. consumer. Personal consumption is projected to have grown a 4% annual rate. Some economists, such as those at Bloomberg, think that rate of consumer spending is unsustainable. Bloomberg economists say the spending pace was a result of “a frenzy of summer travel and entertainment…. We expect consumption to slow in 4Q given elevated inflation, high rates and the resumption of student-loan repayments.”

All of which creates quite a puzzle for the Federal Reserve, which meets to set interest rates on November 1. Does the Fed feel that the economy’s fast growth, if that’s what the report actually says, requires another interest rate increase sooner rather than later? (Almost no one is expecting the Fed to raise rates on November 1.) Or does the Fed agree with those economists who think this rate of growth is unsustainable and likely to fall in the fourth quarter?

The Fed is in is usual pre-meeting quiet period (from October 21 to November 2) so there won’t be any Fed speeches telling the bond market what to believe.

Last week saw volatility in the Treasury (and therefore other bond markets) that sent the yield on the 10-year Treasury to 4.99%. With the trend pointing to the risk of bond prices continuing to fall (which makes yields rise), it’s likely that bond traders will adopt a trade now, wait for nuances later approach to the week (especially ahead of a Fed meeting), in my opinion. That means there’s a very high chance that the yield on the 10-year Treasury will crack the 5% barrier this week.