Skip to main content

Bond Market Selloff Resumes After Strong Retail Sales Data

By: Michael MacKenzie and Liz Capo McCormick

(Bloomberg)–US two-year Treasury yields extended their climb toward last year’s highs after January retail sales blew past forecasts and bolstered expectations for Federal Reserve tightening into the summer. The two-year note’s yield, more sensitive than longer
maturities to Fed policy changes, climbed as much as 8 basis points to nearly 4.70%, the highest since November and within 10
basis points of last year’s multiyear high. Three- and five-year yields also rose to their highest level so far this year. There were signs of buying interest at the yield highs, and the losses were pared, leaving two-year yields higher by less than a basis points at about 4.62%. That’s up from a low of 4.03% earlier this month amid a sharp jump in traders’ expectations for the Fed’s policy path.

“This Fed has been clear: they want to get above 5% and it’s probably two more hikes, although they can go again in June if the data is strong,” said Gregory Faranello, Head of US Rates Trading and Strategy for AmeriVet Securities.

Signs of interest in buying short-maturity interest-rate products into the selloff included futures block trades involving March five-year Treasury note contracts and June SOFR contracts near the lows of the day. Initially, longer-dated Treasury yields rose less, widening their divergence from short maturities. For example the two-year yield was at one point 90 basis points higher than the 10-year, marking the deepest curve inversion since the early 1980s.

Those moves also faded quickly, however, as short-maturity yields retreated from their highs while longer-dated ones rose further ahead of an auction of new 20-year Treasury bonds at 1p.m. New York time, and as Amgen Inc. headlined a slate of five
companies selling bonds Wednesday.

The rebound in retail sales follows January inflation data released Tuesday that showed less deceleration than anticipated.
The swaps market this week has priced in a higher eventual peak for the Fed policy rate, with the July contract’s rate rising to 5.30%, before easing a touch. Traders via swaps covering the December Fed meeting have downgraded the odds of a quarter-point rate cut from the peak by year-end to around 75%.

The Fed has raised its policy rate eight times since March 2022, most recently to a range of 4.5%-4.75% on Feb. 1, and in December, the median forecast by Fed officials was for the policy rate to end the year at about 5.1%.

In spite of the solid retail sales figure, there are grounds for suspecting the consumer will be challenged by the costs imposed by elevated inflation. “The consumer, while he might be spending, is not in a happy mood,” Thierry Wizman, a global currency and interest-rate strategist at Macquarie Capital, said on Bloomberg Television Wednesday. “Inflation has a way of eventually breaking the back of that spending. And you are forced to settle into a lower level of spending in real terms.”