Treasuries Fall on Better Retail Sales

A government report showed April retail sales surged, fueling speculation that the Fed will soon hike interest rates

The unlucky streak for Treasuries continued Tuesday in higher volumes, with losses inflicted by primarily by an above-median April retail sales report and secondarily by the ongoing enthusiasm on Wall Street for consumers' staying power. Retail sales posted a 1.2% gain and ex-autos proved resilient at +1.0%, well above median forecasts of a 0.5% rebound from an unrevised +0.1% in March.

Much like stocks Monday, the report set the bearish tone (especially at the front-end) and prompted sharp initial curve flattening on the two-year note and 30-year bond gap by seven basis points to +236 basis points.

A rush of corporate and agency issuance in anticipation of higher yields also burdened the curve with deals of a variety of maturies. Swap spreads narrowed as hedging activity picked up for these deals. In outright activity there were some NOB purchases (10-year notes for bonds) against the grain of the flattener and a variety of European banks selling in the belly of the curve.

In options trade, calendar roll activity appeared the main driver. Two-year yields hit one-month highs of 3.4% and the June bond shed nearly a point to 100-5/32.

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