Treasuries rose for the first time in four days after a report showed retail sales unexpectedly fell in June, pushing back projected timing for the Federal Reserve’s first interest rate increase in almost a decade.
Investors are awaiting Federal Reserve Chair Janet Yellen’s two-day testimony before Congress starting Wednesday on the central bank’s economic outlook and monetary-policy plans.
“A lot of people are taking this as an indication that the Fed will continue to wait until the data really starts to develop a nice smooth trend,” said Gennadiy Goldberg, U.S. strategist at TD Securities USA LLC in New York. “The Fed’s watching the numbers and the markets watching the Fed.”
Treasury 10-year note yields dropped five basis points, or 0.05 percentage point, to 2.40 percent as of 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The benchmark 2.125 percent security due in May 2025 rose 14/32, or $4.38 per $1,000 face amount, to 97 19/32.
Retail sales dropped 0.3 percent last month, compared with a revised 1 percent growth rate the month before, according to the Commerce Department.
Fed funds futures show a 31 percent chance the central bank will increase its benchmark rate in September from virtually zero, down from 35 percent on Monday, and a 65 percent chance by December, slipping from 69 percent, according to data compiled by Bloomberg.
Policy makers “are on alert that the market doesn’t take their policy actions lightly or for granted,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee. Yellen will try to emphasize things that “steer people” in the right direction as it relates to the economy, a rate hike or overseas events, he said.
The central bank has held its fed funds target at virtually zero since December 2008 to bolster economic growth.
Treasuries rose earlier as Iran and six world powers sealed a historic accord to curb the Islamic Republic’s nuclear program in return for ending sanctions. The nation was once OPEC’s second-biggest producer. An increase in supply that depresses oil prices, which have dropped more than 45 percent in the past year, may keep inflation, which erodes the fixed payments on bonds, in check.
The difference between yields on 10-year Treasuries and similar maturity inflation-indexed securities, measuring inflation expectations over the next 10 years, was at 1.86 percentage points. The Fed’s target for inflation is 2 percent.
“There’s no inflation garnering any steam,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There’s too much of an inflation premium built into the long end of the market.”
The White House predicted this year’s budget deficit will be $455 billion, less than it forecast in February and the lowest yet of President Barack Obama’s presidency. As the economy has recovered, government revenue has increased.