US yields retreat as soft retail sales keep Fed on track to cut rates this year

NEW YORK – US Treasury yields fell on Tuesday after data showed retail sales in the world’s largest economy grew less than expected last month, keeping the Federal Reserve on track to lower interest rates this year.

US yields have fallen in five of the last six sessions as data across different sectors of the economy has started to show moderation. They rose on Monday, however, as investors took profits on price gains that took the benchmark 10-year yield, for instance, to a three-month low last Friday.

A government report on Tuesday showed US retail sales rose 0.1% last month after a downwardly revised 0.2% drop in April. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, gaining 0.3% in May.

“I am not completely surprised that there is a slowdown in consumption,” said Thierry Wizman, global rates and FX strategist at Macquarie in New York.

“Some of the analysis had suggested that it would be around the middle of the year that we will get exhaustion in the excess savings accumulated by households after the pandemic. If we see a slowdown in the consumer, this would be around the right time to expect them,” he added.

In mid-morning trading, the benchmark 10-year yield slid 2.3 basis points (bps) to 4.257%.

US 30-year yields slipped 1.3 bps to 4.397%.

On the front end of the curve, the two-year yield declined 3.8 bps to 4.724%.

The US yield curve, meanwhile, modestly reduced its inversion on Tuesday. The spread between US two- and 10-year yields, which typically signals the onset of recession was at minus 46.6 bps, compared with minus 48.9 bps late on Monday.

The curve is what is called a “bull steepener,” in which short-term rates are falling more sharply than longer-dated ones. This often happens when the Fed is expected to cut interest rates.

Following the retail sales data, fed funds futures raised the chances of easing in September to around 67%, from about 60% late on Monday, according to LSEG’s calculations. The market is also pricing between one to two rate cuts of 25 bps each this year.

Later on Tuesday, the US Treasury will auction USD 13 billion in 20-year bonds.

“As a theme, we’re constructive on the prospects for the auction in light of how well last week’s 10s and 30s (auctions),” wrote BMO Capital in a research note.

“The caveat is that 20s occupy a very specific place on the curve, one in which the influence of relative value creates concern on the heels of the recent flight-to-liquidity stemming from the dislocations in Europe.”

(Reporting by Gertrude Chavez-Dreyfuss, Editing by Nick Zieminski)