US yields retreat after weak retail sales data

NEW YORK – US Treasury yields fell on Friday after data showed retail sales in the world’s largest economy tumbled in January, keeping the Federal Reserve on track to cut interest rates later this year.

The benchmark 10-year yield slid 5.6 basis points to 4.469%, declining for a third straight week. Over the last two days, the 10-year yield has fallen nearly 17 bps. US 30-year yields also eased, down 3.4 bps at 4.693%.

The two-year yield, which reflects interest rate expectations, declined 5.4 bps to 4.257%. On the week, however, it was up 3.2 bps.

US yields retreated after data showed retail sales dropped 0.9% last month after an upwardly revised 0.7% increase in December. Economists polled by Reuters had forecast retail sales, which are mostly goods and not adjusted for inflation, would dip 0.1%.

US import prices also showed a favorable inflation trend, rising 0.3% in January, which was slightly less than expected after an upwardly revised 0.2% gain in December. The surge in the cost of fuels was partially offset by declines in the prices of motor vehicles and consumer goods.

Overall, Andy Wells, chief investment officer of investment management firm SanJac Alpha LP in Houston believes the secular inflation environment will remain elevated although growth will slow a little bit.

“We’re kind of having a stagflation backdrop, not scary stagflation, just saying that growth is going to be slower, and the lower end of inflation will be a little higher than what we’re accustomed to,” said Wells.

“What that means is that rates will drift a little bit higher on the long end of the curve, but on the short end, it will be rangebound. The two-year we see that as rangebound.”

Earlier this week, data showed both consumer prices and producer price indexes both exceeded estimates, reinforcing expectations of one rate cut this year.

Following the retail sales data, US rate futures priced in 41 bps of easing this year, compared with 33 bps late Thursday, according to LSEG calculations. The next rate reduction is expected either at the Fed’s September or October policy meeting.

The yield curve, meanwhile, slightly reduced its steepness on Friday, with the spread between two-year and 10-year yields at 21.5 bps, compared with 22 late Thursday.

Analysts said this was likely a retracement of the steepening trend – in which yields on the long end of the curve are higher than those on the front end – that has been going on since the Fed launched its easing cycle in September.

Steepeners remain a popular trade in the bond market with the Fed being in a rate-cutting phase and the short end of the curve tethered to rate policy moves. The strategy involves buying short-dated Treasuries and reducing longer-dated exposure.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alex Richardson, Nia Williams and Nick Zieminski)