Treasuries Gain as Retail Sales, Inflation Data Trail Forecasts

  • Yields decline as consumer purchases advance by 0.1 percent
  • Futures traders see 66% chance of a December Fed rate increase

Treasuries rose, pushing yields to the lowest in a week, after data showed U.S. retail sales increased less than forecast in October and producer prices unexpectedly declined.

Yields fell as separate reports showed consumer purchases rose 0.1 percent in October, below the 0.3 percent median forecast of 84 economists surveyed by Bloomberg, and producer prices declined for a second month even as a gain was expected. While a gauge of consumer confidence exceeded forecasts, an underlying metric showed inflation expectations matched a 13-year low hit in October.

Traders are parsing every piece of economic data for hints about when the Federal Reserve will deem the U.S. strong enough to boost interest rates for the first time since 2006. Treasury 10-year yields have retreated from an almost four-month high reached Nov. 9 after a stronger-than-forecast October jobs report boosted speculation that the Fed will move in December. The central bank last month signaled it may boost rates at its next meeting, while reiterating its dependence on data.

"The market is looking at inflation gauges more closely than usual," said Gennadiy Goldberg, U.S. interest-rates strategist in New York at TD Securities, one of the 22 primary dealers that trade with the Fed. The data "will make them question whether December is the time to go, but we think they’ll go."

U.S. 10-year note yields fell five basis points, or 0.05 percentage point, to 2.27 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, the lowest on a closing basis since Nov. 5. The price of the 2.25 percent note due November 2025 rose 13/32, or $4.06 per $1,000 face amount, to 99 27/32.

Policy Divergence

The gains in Treasuries followed a broad advance in European government bonds, after data showed economic growth in the region slowed more than expected in the third quarter. That bolstered the case for the European Central bank to provide more monetary stimulus.

Signs of diverging ECB and Fed policies have driven a wedge between yields on U.S. debt and that of other countries. The 10-year U.S. Treasury note yields more than equivalent debt of 18 other developed countries, according to data compiled by Bloomberg. Analysts at Barclays Plc don’t expect that gap to expand.

"We expect U.S. and European monetary policies to diverge," but "markets are largely priced for such an outcome," analysts at Barclays wrote in a Thursday note.

Fed Liftoff

Futures contracts show traders see a 66 percent chance that officials will raise rates by year-end. The probability has risen from 35 percent on Oct. 27, the day before policy makers kept their target near zero at their October meeting and signaled that they’re assessing whether to lift it in December. The calculations assume the benchmark will average 0.375 percent after the first increase, versus the current target range of zero to 0.25 percent.

Traders are still betting U.S. central-bank officials will move slowly after liftoff. Futures prices imply that investors expect about three interest-rate increases by early 2017, and the effective fed funds rate to rise to 1.4 percent at the end of that year. Fed Chair Janet Yellen has said in statements this year that the central bank will raise interest rates at a gradual pace.

"The Fed’s been telling us they’re likely to go, but they’re also telling us we’re going at a very slow and shallow pace," said Donald Ellenberger, who oversees about $10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh.

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