TREASURIES-US yields fall after sharp decline in retail sales

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US Treasuries in overbought territory, analyst says

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US 10-yield has fallen about 17 bps in two days

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US rate futures now price in 40 bps in cuts in 2025

(Adds new comment, import prices data, graphic, byline, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 14 (Reuters) - U.S. Treasury yields fell on Friday after data showed retail sales in the world's largest economy tumbled in January, keeping the Federal Reserve on track to cut interest rates later this year.

The benchmark 10-year yield slid 5.6 basis points to 4.469%. Over the last two days, the 10-year yield has fallen 17 bps. U.S. 30-year yields also eased, down 4.3 bps at 4.683%.

The two-year yield, which reflects interest rate expectations, declined 5.4 bps to 4.257%.

U.S. yields retreated after data showed retail sales dropped 0.9% last month after an upwardly revised 0.7% increase in December. Economists polled by Reuters had forecast retail sales, which are mostly goods and not adjusted for inflation, would dip 0.1%.

"We're skeptical the report signals a true inflection point in consumer spending," wrote Will Compernolle, a macro strategist at FHN Financial in Chicago, in a research note. "Paired with an overzealous reaction to yesterday's PPI (producer prices index), bonds have moved into overbought territory."

Treasuries rallied

on Thursday, pushing yields sharply lower, as certain components in the PPI for January pointed to lower inflation.

U.S. import prices also showed a favorable inflation trend, rising 0.3% in January, which was slightly less than expected after an upwardly revised 0.2% gain in December. The surge in the cost of fuels was partially offset by declines in the prices of motor vehicles and consumer goods.

Following the retail sales data, U.S. rate futures priced in 40 bps of easing this year, compared with 33 bps late Thursday, according to LSEG calculations. The next rate reduction is expected either at the Fed's September or October policy meeting.

The yield curve, meanwhile, slightly reduced its steepness following the data, with the spread between two-year and 10-year yields at 21.5 bps, compared with 22 late Thursday.

Analysts said this was likely a retracement of the steepening trend - in which yields on the long end of the curve are higher than those on the front end - that has been going on since the Fed launched its easing cycle in September.

Steepeners remain a popular trade in the bond market with the Fed being in a rate-cutting phase and the short end of the curve tethered to rate policy moves. The strategy involves buying short-dated Treasuries and reducing longer-dated exposure.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alex Richardson and Nia Williams)