US yields fall on Fed fallout, economic data

NEW YORK, June 15 (Reuters) – US Treasury yields were lower on Thursday as investors parsed a slew of economic data and assessed the ramifications from the latest policy statement released on Wednesday by the Federal Reserve.

Economic data showed US retail sales rose 0.3% in May, above expectations for a 0.1% decline while weekly initial jobless claims were unchanged from the prior week at 262,000 and above the estimate for 249,000. That suggested the labor market may be showing signs of finally loosening, although recent reports have also been affected by policy changes in Minnesota, holidays, and other unusual discrepancies.

The Fed on Wednesday held rates steady, as was widely expected, but signaled in its new projections that two more small hikes to increase borrowing costs by as much as 50 basis points (bps) may be needed due to a resilient economy and a slower-than-expected decline in inflation.

“Today is primarily due to the data, but there is an echo of the comments that Chair (Jerome) Powell made yesterday, and repeatedly throughout the press conference he referred to variations of the words of ‘softer labor market,'” said Amar Reganti, a Boston-based fixed income strategist at Hartford Funds.

“Powell mentioned how the market is reactive to Fed communications, and what he said was there is probably going to be additional tightening at some point this year, depending on the data, but as of right now the majority of the committee believes there needs to be, and the markets kind of met him halfway.”

The yield on 10-year Treasury notes was down 7.4 basis points to 3.724%, on track for its biggest one-day drop since May 30.

Expectations for a hike of 25 bps by the Fed at the central bank’s July meeting have moved up to 67% from 62.3% a day prior and 50.9% a week ago, according to CME’s FedWatch Tool.

In contrast to the Fed, the European Central Bank (ECB) raised borrowing costs to their highest level in 22 years on Thursday and left the door open to more hikes in the latest sign global central banks are no longer acting as closely in concert as they have been in recent years. The Bank of Japan is scheduled to issue a policy statement on Friday.

The yield on the 30-year Treasury bond was down 3.4 basis points to 3.847%.

In addition to the retail sales and claims data, import prices fell in May and the annual decrease was the sharpest in three years and gauges of manufacturing from the Federal Reserve banks of Philadelphia and New York hinted at an improving business outlook.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 91.6 basis points after inverting by as much as a negative 95.53 on Wednesday, its deepest inversion in 3 months.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 6.9 basis points at 4.638%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.203%, after closing at 2.190% on Wednesday.

The 10-year TIPS breakeven rate was last at 2.221%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; editing by Jonathan Oatis)