Treasuries Gain as Tepid U.S. Data Push Traders to Reprice Fed

  • Yields fall as retail sales, producer prices trail forecasts
  • Futures indicate 16% chance of Fed rate increase next month

Pimco's Mark Kiesel on U.S. Treasuries, Bonds

Treasuries gained, with 10-year note yields declining by the most in two weeks, after data on U.S. retail sales and wholesale prices in July fell short of forecasts, undermining the Federal Reserve’s case to raise interest rates this year.

Yields on two-year notes, the coupon maturity most sensitive to Fed policy expectations, fell as traders pared bets on a 2016 rate hike. U.S. data showed sales at retailers were little changed in July while producer prices unexpectedly declined by the most in almost a year, a sign inflation is likely to stay muted.

"Both data were much worse than expected -- we have Treasury prices firming across the curve," said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. "There’s still demand for value represented in U.S. Treasuries."

Investor appetite for U.S. debt has been resilient since yields surged on Aug. 5 after stronger-than-forecast July jobs data. This week’s three U.S. bond and note sales were well-received, with a $23 billion 10-year debt offering on Aug. 10 drawing the lowest auction yield in four years after a three-year sale a day earlier attracted the strongest demand of 2016.

Fed Wagers

The benchmark U.S. 10-year note yield fell five basis points, or 0.05 percentage point, to 1.51 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data, after touching as low as 1.48 percent. The price of the 1.5 percent security due in August 2026 was 99 7/8. Ten-year yields reached a record low 1.318 percent on July 6.

Two-year yields dropped four basis points to 0.71 percent.

The implied probability of a Fed hike next month is just 16 percent, according to futures data compiled by Bloomberg, down from 22 percent on Thursday and 26 percent a week ago. Futures prices indicate officials are more likely to do nothing for the remainder of the year than to move.

Policy makers forecast one hike in 2016, after twice cutting their projections this year. San Francisco Fed President John Williams said Thursday that an increase this year is warranted.

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