TREASURIES-Treasury yields higher in choppy trade after data

BY Reuters | ECONOMIC | 01/14/22 10:24 AM EST

By Chuck Mikolajczak

NEW YORK, Jan 14 (Reuters) - U.S. Treasury yields were higher on Friday in choppy trade following a round of soft economic data on consumer spending and manufacturing activity.

Yields moved lower after the Commerce Department said retail sales dropped 1.9% in December after a 0.2% rise in the prior month, well short of the unchanged forecast, as Americans grappled with a sharp climb in COVID-19 cases and a shortage of goods.

However, other data on import prices fell last month in part due to a decline in the cost of petroleum products, hinting that the worst of high inflation could be at an end.

Yields reversed course, however, moving higher after the Federal Reserve said manufacturing output dropped 0.3% in December, shy of the estimate calling for a 0.5% rise.

The softer data was likely not enough to significantly alter expectations for the Fed's policy path, with expectations for an interest rate hike of at least 25 basis points at the March nearing 90%, according to Refintiv data.

"Most of the Fed governors and people that sit on the board seem to be pretty emphatic about raising rates at least three, if not four, times this year," said Tom di Galoma, managing director at Seaport Global Holdings in New York.

"I don't know how they step away from that just because we got a weak retail sales number."

Di Galoma noted that with the 10-year yield moving to levels not seen since January 2020 at 1.808% last week, it has encouraged buyers to step in.

The yield on 10-year Treasury notes was up 4.9 basis points to 1.758%. After gaining about 25 basis points last week, the 10-year yield is slightly lower for this week.

The yield on the 10-year continued its move higher following the University of Michigan's preliminary Consumer Sentiment reading for January, which dipped to 68.8 from December's final reading of 70.6. One-year inflation expectations ticked up to 4.9% from the prior 4.8%.

The yield on the 30-year Treasury bond was up 4.6 basis points to 2.100%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 81.6 basis points from a low of 79.9 on Thursday.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 3.9 basis points at 0.938%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.821%, after closing at 2.817% on Thursday.

The 10-year TIPS breakeven rate was last at 2.476%, indicating the market sees inflation averaging about 2.5% a year for the next decade.

The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.446%. (Reporting by Chuck Mikolajczak Editing by Marguerita Choy)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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