TREASURIES-Yields drop as retail sales miss expectations, BOJ keeps yield cap

BY Reuters | ECONOMIC | 01/18/23 10:05 AM EST
       By Karen Brettell
       NEW YORK, Jan 18 (Reuters) - U.S. 10-year Treasury
yields fell to a four-month low on Wednesday after data showed
that U.S. retail sales fell more than expected in December and
as the Bank of Japan maintained its bond yield cap, reducing
concerns that investors would switch out of U.S. debt and into
Japanese bonds.
    U.S. retail sales were pulled down by a decline in motor
vehicle purchases and a range of other goods, putting consumer
spending and the overall economy on a weaker growth path heading
into 2023.
    U.S. producer prices also fell more than expected in
December as the costs of energy products and food declined,
offering more evidence that inflation was receding.
    The data is "part and parcel of this convergence from the
Fed being behind to the Fed now aggressively tightening rates
and ... towards the end of that process," said David
Petrosinelli, senior trader with InspereX in New York.
    The Federal Reserve is expected to raise rates by 25 basis
points when it concludes its two-day meeting on Feb. 1.
    Fed funds futures traders are now pricing for the Fed's
benchmark rate to top out at 4.88% in June, down from 4.90%
before Wednesday's data, with rates then expected to fall to
4.36% in December. The fed funds rate is currently at 4.33%.

    Petrosinelli said that the fall in retail sales fits the
trend of consumers spreading out their holiday purchases over
several months.
    But January's data will also be key to see if December's
fall was holiday-related, or if there are also issues with
consumer spending. "That's the real question this year - will
the consumer tip over, will personal consumption tip over,"
Petrosinelli said.
    Benchmark 10-year notes fell to 3.375%, the
lowst since Sept. 13. Two-year yields reached 4.072%,
the lowest since Oct. 4. The yield spread between two-year and
10-year notes was last a minus 72 basis points.
    Yields had fallen earlier on Wednesday after the Bank of
Japan maintained ultra-low interest rates, including a bond
yield cap it was struggling to defend.
    Instead of changing its stimulus program, the BOJ crafted a
new strategy to prevent long-term rates from rising too much - a
move some analysts took as a sign Governor Haruhiko Kuroda will
hold off making big policy shifts during the remaining months of
his term, which ends in April.
    If the Japanese central bank unwinds its yield curve control
it is likely that Japanese yields will rise further, which would
make the debt more attractive relative to U.S. Treasuries after
accounting for foreign exchange hedges. In turn, Japanese
investors may sell, or be less likely to buy, U.S. government
    The U.S. debt ceiling remains a potential market issue, with
the government expected to reach its maximum borrowing capacity
this week, after which it will need to rely on extraordinary
measures. The Treasury is expected to be able to fund itself
until mid-year or longer, though there is a lot of uncertainty
of when it will ultimately run out of money if Congress fails to
increase the debt limit.
    The Treasury will sell $12 billion in 20-year bonds on
Wednesday and $17 billion in 10-year Treasury
Inflation-Protected Securities on Thursday.
    January 18 Wednesday 9:50AM New York / 1450 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.55         4.6669    -0.005
 Six-month bills               4.6575       4.8361    -0.037
 Two-year note                 100-69/256   4.1035    -0.089
 Three-year note               100-88/256   3.7522    -0.112
 Five-year note                101-222/256  3.4608    -0.148
 Seven-year note               102-200/256  3.4216    -0.157
 10-year note                  106-24/256   3.3898    -0.145
 20-year bond                  104-156/256  3.6703    -0.141
 30-year bond                  108-132/256  3.5354    -0.113

                               Last (bps)   Net
 U.S. 2-year dollar swap        27.50         2.25
 U.S. 3-year dollar swap        15.25         2.00
 U.S. 5-year dollar swap         5.00         2.50
 U.S. 10-year dollar swap       -3.25         2.00
 U.S. 30-year dollar swap      -37.50         2.75

 (Reporting by Karen Brettell
Editing by Tomasz Janowski)

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