TREASURIES-US yields sink as soft retail sales back Fed rate cut view this year

BY Reuters | ECONOMIC | 06/18/24 03:58 PM EDT

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U.S. retail sales come in weaker than expected in May

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U.S. yields fall in five of last six sessions after data

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U.S. 20-year bond auction shows strong results

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Fed officials look for confirmation inflation is on right track

(Adds comment, 20-year bond auction results, comments from Fed officials, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, June 18 (Reuters) - U.S. Treasury yields fell on Tuesday after data showed retail sales in the world's largest economy grew less than expected last month, reinforcing expectations that the Federal Reserve is likely to start lowering interest rates this year.

U.S. yields have fallen in five of the last six sessions as data across different sectors of the economy has started to show moderation. They rose on Monday, however, as investors took profits on price gains that took the benchmark 10-year yield, for instance, to a three-month low last Friday.

A government report on Tuesday showed U.S. retail sales rose 0.1% last month after a downwardly revised 0.2% drop in April. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, gaining 0.3% in May. However, manufacturing output surged 0.9% in May following a downwardly revised 0.4% drop in April, the Fed said in a separate report on Tuesday. Economists had forecast factory production rebounding 0.3% after a previously reported 0.3% fall in April. Manufacturing accounts 10.4% of the economy.

Following the retail sales data and manufacturing data, fed funds futures raised the chances of easing in September to around 67%, from about 60% late on Monday, according to LSEG's calculations. The market is also pricing between one to two rate cuts of 25 bps each this year.

"It seems like evidence is piling up that the economy is downshifting. I was surprised by the resilience of the economy going into the first part of this year, the first quarter," said Matt Eagan, portfolio manager and head of Full Discretion Team at Loomis Sayles.

"And we're seeming now to reach a point where on the margin we're softening. That sets the Fed up better for actually pulling the trigger some time at the end of this year."

Several Fed officials on Tuesday are looking for confirmation that inflation is sustainably cooling as well as any warning signs from a still-strong labor market

In afternoon trading, the benchmark 10-year yield slid 6.2 basis points (bps) to 4.216%.

U.S. 30-year yields fell 5.9 bps to 4.350%.

On the front end of the curve, the two-year yield declined 5.3 bps to 4.707%.

U.S. yields stayed lower after a better-than-expected 20-year Treasury bond auction.

The auction showed strong demand, with the high yield stopping at 4.452%, lower than the expected rate at the bid deadline. This suggested that investors were willing to settle for a lower rate to take down the note.

The bid-to-cover ratio, a gauge of demand, was 2.74, compared with an average of 2.67. According to BMO Capital, non-dealer allocation of the bond was at a record high.

Post-auction, U.S. 20-year yields were down 5.9 bps at 4.461%.

The U.S. yield curve, meanwhile, deepened its inversion on Tuesday. The spread between U.S. two- and 10-year yields, which typically signals that recession is on the horizon, was at minus 49.3 , compared with 48.9 bps late on Monday. (Reporting by Gertrude Chavez-Dreyfuss, Editing by Nick Zieminski and Josie Kao)

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.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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