By William Watts, MarketWatch

Investors view September rate decision as 'binary event'

U.S. Treasurys traded flat to higher Friday, putting pressure on yields, as investors await the week's main event: Federal Reserve Chairwoman Janet Yellen's speech in Jackson Hole, Wyo.

Treasurys barely budged after the U.S. government estimated that gross domestic product grew at a lackluster 1.1% annualized pace (http://www.marketwatch.com/story/second-quarter-gdp-still-weak-11-2016-08-26) in the second quarter, revised down slightly from an earlier estimate but largely in line with expectations. Separately, data showed the U.S. trade gap narrowed more than expected (http://www.marketwatch.com/story/us-trade-gap-narrows-in-july-advance-report-shows-2016-08-26) in July.

The yield on the benchmark 10-year U.S. Treasury note fell 1.7 basis points to 1.559%. Yields fall as debt prices rise; a basis point is a hundredth of a percentage point. The yield on the 2-year Treasury note , which is more sensitive to rate expectations, was flat at 0.786%.

Trading in bonds and equities has remained becalmed all week as investors looked ahead to Yellen's speech, set for 10 a.m. Eastern, at the Kansas City Fed's annual symposium in the Rockies. Investors and economists have debated what signals, if any, Yellen will send regarding the timing and pace of future rate increases.

"Our view on the Fed is still that the Bank will hike rates again at the December meeting. That's also just above a 50% probability (56%) according to the pricing in the futures market," wrote Steven Barrow, currency and interest-rate strategist at Standard Bank. "If Yellen's comments at the Jackson Hole conference today seem consistent with this idea we'd expect the dollar to lose some ground and for Treasurys to rally."

Yellen's speech comes after relatively hawkish comments from other Fed officials, including Vice Chair Stanley Fischer as well as Kansas City Fed President Esther George, who had dissented in favor of a rate rise at the central bank's July policy meeting. That's led to some speculation Yellen could signal that a rate move as early as next month's policy meeting is possible.

But Barrow said Yellen is unlikely to be that explicit and, in fact, "may even try to avoid comments about the current monetary policy stance altogether."

That would be bullish for Treasurys, pushing yields lower, he said.

The potential for a volatile reaction to Yellen's comments, however, runs high, said Lena Komileva, chief economist at G-plus Economics, in a note.

Investors see the chances of a September rate move as a "binary event," she said, which means that an omission of any "date guidance" on the next rate move or the lack of any specific reference to the September meeting would likely be "overinterpreted" as a dovish signal, Komileva said.

Meanwhile, with the yield curve--the spread between short and longer-dated Treasury yields--the flattest its been since 2008, "any signal that the Fed is approaching the next step of policy normalization, while remaining cautiously behind the U.S. inflation curve, would carry asymmetric upside risks to U.S. yields," she said.

The yield on the 30-year Treasury bond yield fell 2.3 basis points to 2.241%.

(END) Dow Jones Newswires

August 26, 2016 09:29 ET (13:29 GMT)