US yields rise but off highs as stocks end lower

NEW YORK, July 18 (Reuters) – US bond yields rose on Monday as upbeat economic data last week and a quiet period from the Federal Reserve set the stage for risk taking, but ended below session highs as stocks sold off into the close.

US economic data on Friday showed stronger-than-expected retail sales, an uptick in consumer sentiment and lower inflation expectations.

Markets had all but priced in a 100 basis points rate hike during the Fed’s upcoming meeting, but the US central bank on Friday signaled a 75 basis points increase that would mirror its June decision.

Jim Barnes, director of fixed income at Bryn Mawr Trust, said the early gains in stocks pressured bond prices lower, as did the idea that the Fed wouldn’t raise a full percentage point. “As we entered into the quiet period, the Fed seems to be leaning more towards 75 basis points than to 100 basis points,” he said.

But stocks were volatile in afternoon trading, with the Dow industrials up over 350 points at the session high but dropping over 500 points to close down more than 200, after a report said Apple was preparing for an economic downturn.

“We had a reversal with the Dow plunging and bond yields were lower as a result,” said Tom di Galoma, managing director at Seaport Global Holdings.

“It seems to be we are reversing to lower yields rather than higher yields due to the fact that we might be approaching a recession as we get closer to the (Northern Hemisphere) fall.”

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 3.7 basis points at 3.172%.

The yield on 10-year Treasury notes was up 5.7 basis points at 2.987%.

The yield on the 30-year Treasury bond was up 6.2 basis points at 3.156%.

The gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -18.8 basis points.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.66%, after closing at 2.614% on Friday.

(Reporting by Rodrigo Campos; Editing by Richard Chang and Jonathan Oatis)