Yields briefly pop to nearly 10-month highs after strong US retail sales

NEW YORK, Aug 15 – Benchmark 10-year US Treasury yields hit an almost 10-month high on Tuesday before quickly dipping, after data showed July retail sales rose more than expected.

Retail sales jumped 0.7% last month, above the 0.4% forecast. June data was revised higher to show sales rising 0.3% instead of the previously reported 0.2%.

Americans boosted online purchases and dined out more, suggesting the US economy continues to expand and putting recession fears at bay. Resilient US data has also boosted expectations that the Federal Reserve may hold interest rates higher for longer to bring inflation down closer to its 2% annual target.

Markets have priced in “a considerably higher probability that we stay around the current terminal rate for a longer period than was previously expected,” said Jonathan Cohn, head of US rates desk strategy at Nomura in New York.

Benchmark 10-year yields hit 4.274%, the highest since Oct. 24, before settling at 4.215% in afternoon trading.

Two-year yields reached 5.024%, the highest since July 7, before retreating to 4.952%. The interest rate-sensitive notes are holding below the 5.120% yield reached on July 6, the highest since June 2007.

The inversion in the closely watched yield curve between two- and 10-year notes narrowed to minus 74 basis points.

The Fed will release minutes from its July 25-26 meeting on Wednesday. The Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming, on Aug. 24-26 could also deliver clarity on Fed thinking.

Futures markets are now pricing in a nearly 35% chance that the Fed’s benchmark rate will be above its current range at its December meeting, up from a roughly 25% chance seen a month ago.

The market is evaluating “how far the sell-off can run” before the Fed releases minutes of its previous meeting Thursday afternoon, said Benjamin Jeffery, US rates strategy at BMO Capital Markets.

August 15 Tuesday 4:00PM New York / 2000 GMT

(Reporting by Karen Brettell; Editing by Emelia Sithole-Matarise, Richard Chang and Jonathan Oatis)