Bonds: Weaker GDP buoys Gilts, US Treasuries retrace losses

These were the movements in some of the most widely-followed 10-year sovereign bond yields:

US: 2.92% (-3bp)

UK: 1.55% (-1bp)

Germany: 0.71% (-2bp)

France: 0.98% (-1bp)

Italy: 2.08% (+3bp)

Spain: 1.52% (+1bp)

Portugal: 2.03% (+3bp)

Greece: 4.37% (-7bp)

Japan: 0.06% (+0bp)

Gilts edged higher after revised figures from the Office for National Statistics revealed that a sharp slowdown in business investment acted as a drag on overall economic activity.

According to ONS, UK GDP expanded at a quarter-on-quarter pace of 0.4% over the three months to September, less than the 0.5% clip initially estimated, as business investment ground to a halt and net imports continued to detract from the economy's momentum.

In the background, yields on longer-term US Treasuries were retracing a large part of the prior session's ill-gotten gains in the wake of the release of a more hawkish than expected set of Federal Reserve policy meeting minutes.

Commenting on the minutes of the 30-31 January Federal Open Market Committee meeting, Mickey Levy and Roiana Reid at Berenberg Capital Markets pointed out rate-setters' explanation that they decided to "preface" their now standard reference to a gradual pace of tightening because of the strengthening in the near-term economic outlook and associated higher chance of increases in the Federal funds rate.

"With the exception of the financial market volatility, run-up in interest rates and tighter financial market conditions, key developments since the Fed’s December meeting — when it last published its economic projections — underpin the Fed’s more optimistic economic and inflation outlook and a more “hawkish” monetary policy stance: 1) wage gains accelerated in the January Employment Report; 2) the CPI picked up more than expected, confirming the Fed’s forecast of an upward drift in inflation toward its 2% target; 3) new tax legislation passed and confidence measures remained elevated; 4) the bipartisan Congressional budget agreement increases the caps on spending authorization in FY 2018 and FY 2019 to allow for more spending on defense and infrastructure; and 5) market-based measures of inflation compensation rose," the two Berenberg economists added.

For his part, Jim Reid at Deutsche Bank chipped in saying: "Notably, the relatively hawkish minutes was before the January wage growth and CPI / PPI prints, so it seems reasonable to assume that if the Fed was getting more confident in their growth and inflation outlook at their meeting, the subsequent data releases would have only added to their views."

Nevertheless, the assortment of Fed speakers who took to the podium on Thursday, including new Fed governor Randal Quarles, St.Louis Fed boss James Bullard and the Dallas Fed's Robert Kaplan, were not particularly 'hawkish'.

However, a well-known policy hawk, New York Fed chief William Dudley stayed mum on the policy outlook, while Atlanta Fed president Raphael Bostic said the central bank was carefully calibrating its return to normal policy settings.

On the other side of the Pond, according to economists the European Central Bank's last policy meeting minutes, which released on Thursday, showed that rate-setters in Frankfurt were still being cautious in their communications.

"[...] it was concluded by a majority that such an adjustment was premature and not yet justified by the stronger confidence. What we take from this piece of news, is that the GC may choose a gradual approach to changes to forward guidance, possibly by first dropping the asymmetric bias, namely by dropping “If the outlook became less favourable, or if financial conditions became inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stood ready to increase the APP in terms of size and/or duration," explained Antonio Garcia Pascual and Philppe Gudin at Barclays Research.