US yields rise as economic data dents rate cut expectations

NEW YORK, Jan 17 – US Treasury yields climbed on Wednesday after an unexpected rise in UK inflation last month and stronger-than-expected US December retail sales data strengthened the case that interest rate cuts will not be as imminent as the market expects.

The UK inflation print, as well as more push-back from European Central Bank officials on Wednesday against interest rate cut bets, pushed European bond yields higher.

Treasury yields, which move inversely to prices, followed suit, with the uptick gaining momentum after Commerce Department data showing retail sales in December grew by 0.6% month on month, above the 0.4% economists had expected in a Reuters poll.

Weak demand for a 20-year bond auction also helped lift yields later on Wednesday.

“December retail sales reflect an economy that, although slowing, continues to be underpinned by consumer spending,” said Quincy Krosby, chief global strategist for LPL Financial.

“For the Federal Reserve, slower consumer demand would help propel inflation to decelerate at a faster pace; however, with consumer confidence gaining momentum, the economic landscape remains on solid ground,” she said in a note.

The short-end of the yield curve, more closely linked to monetary policy expectations, led the move higher.

Two-year yields rose about 13 basis points to 4.354%, their biggest daily increase in over a month. Benchmark 10-year yields added about four basis points to 4.104%, their highest since Dec. 13.

In the short-term rate futures market, traders dialed back expectations of a Federal Reserve interest rate cut in March, which on Wednesday was seen as having a nearly 54% probability, against 63% a day earlier, according to CME Group data.

“We are seeing relatively strong short-term US data which is convincing people to push back on Fed pricing,” said Brij Khurana, fixed-income portfolio manager at Wellington Management. “I do think there’s too much priced into the front-end of the yield curve in terms of cuts,” he said.

On the economic front, a Fed survey on Wednesday showed US economic activity saw little or no change from December through early January, with firms reporting pricing pressures were mixed and citing signs of a cooling labor market.

Separately, the Treasury saw soft demand for a USD 13 billion auction of 20-year bonds, a gauge of investors’ appetite for long-term government debt securities ahead of an expected flood of debt issuance this year.

The paper was sold at a high yield of 4.423%, about nine basis points above where it was trading before the sale, a sign that buyers demanded a premium to absorb the issuance. The bid-to-cover ratio, a measure of demand, was 2.53 – the lowest since March last year. The Treasury will sell USD 18 billion of 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday.

The curve comparing two-year and 10-year Treasury yields flattened to about minus 25 basis points on Wednesday because of the sharp yield rise in two-year paper, after steepening to about minus 16 basis points on Tuesday – the least inverted it had been since early November.

The inversion of the 2/10 yield curve is closely watched by investors as it has generally preceded recessions.

(Reporting by Davide Barbuscia; Editing by Christina Fincher and Andrea Ricci)