Treasuries Decline Most in 2016 as Oil Surges, U.S. Stocks Rally

  • Benchmark yields rise after approaching record low on Thursday
  • Data show U.S. retail sales gain more than forecast in January

Treasuries fell, with yields rising the most in two months, as oil had its best day in seven years and U.S. stocks halted a five-day decline.

Benchmark 10-year notes snapped a six-day rally that pushed yields near record-low levels. Bonds declined as crude prices rose 11 percent and after a report showed U.S. retail sales increased for a third straight month in January. The yield on the 10-year note dropped on Thursday to within 15 basis points of the 1.379 percent record low set in July 2012.

Treasuries still gained for a third straight week as turmoil in global financial markets drove demand for the relative safety of U.S. government debt and as traders pared bets that the Federal Reserve will raise interest rates this year. Fed Chair Janet Yellen said this week that the central bank may delay increases though not stop them completely, noting that weakening stocks posed a risk to the economy.

"It’s a good reprieve -- I don’t know how long-lived that’d be, but it’s definitely a good change," said Aaron Kohli, an interest-rate strategist in New York with BMO Capital Markets, one of the 22 primary dealers that trade with the Fed. "It does remind us that the market has become very pessimistic, and the U.S. consumer still at least has a little bit of strength."

The benchmark Treasury 10-year yield rose nine basis points, or 0.09 percentage point, to 1.75 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 fell 26/32, or $8.13 per $1,000 face amount, to 98 7/8. The yield fell as low as 1.53 percent Thursday.

Relative Strength

Thirty-year bonds, which are sensitive to the outlook for inflation, led declines, with yields rising 11 basis points to 2.6 percent.

The 14-day relative strength index for 10-year note yields rose to about 34, after falling below the threshold of 30 some traders see as a sign a security has moved too fast. 

The 0.2 percent January retail sales increase matched the previous month’s advance that was initially reported as a decline, Commerce Department data showed Friday. The median forecast in a Bloomberg survey called for a 0.1 percent gain in January.

"We’re still in rally mode, we’re just simply not crouching waiting for the next blow," said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee. "This is the second average-to-good retail sales in the past six months."

The probability the Fed will follow its December rate increase with another in 2016 has dropped to 30 percent from a 93 percent chance assigned at the start of the year, futures contracts indicate. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase.

Economists still see Treasury yields rising this year, though they’re cutting their forecasts for how far. The latest prediction for the 10-year note is 2.46 percent, down from a projection of as high as 2.82 percent in January, based on a Bloomberg survey with the most recent forecasts given the heaviest weighting.

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