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Rates Continue Decline Despite Strong Headline GDP

Friday's GDP report pushed bond yields further into negative territory this week, closing out the week with 6-10 bps declines.  The initial move lower in yields this week came from overseas markets as a result of the US dollar's strength (which is due to the US economy's strength versus other developed countries).  Friday's release pushed week-to-date yield declines even further as the details of the GDP release were not as strong as the 3.2% overall growth indicated.  That reading, which well outpaced expectations, was driven by a large increase in business inventories and higher than forecast net exports (due to lower imports).  Unfortunately, inventory increases generally augur weaker future growth, as businesses don't need to purchase more products until their inventories are sold off.  Consumer spending rose at a reasonably healthy rate of 1.2%, while inflation slowed further as the Federal Reserve's preferred measure rose by just 1.3%, well below their 2% target.

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