Long-term Treasury yields traded at their highest levels of the new year on Wednesday after robust U.S. retail sales for December and a pickup in U.K. inflation damped enthusiasm over the extent of central bank interest-rate cuts this year.
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
rose 12 basis points to 4.346% from 4.226% on Tuesday. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
jumped 4 basis points to 4.104% from 4.064% on Tuesday. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
rose 1.8 basis points to 4.321% from 4.303% on Tuesday. - Tuesday’s levels were the highest for the 10- and 30-year yields since Dec. 12.
What’s driving markets
In U.S. economic data on Wednesday, retail sales climbed 0.6% for December, above the 0.4% gain expected in The Wall Street Journal forecast.
The data lent further credence to the idea that the economy remains too strong for the Fed to start cutting rates as soon as March. On Tuesday, Federal Reserve Gov. Christopher Waller said that the central bank will likely cut rates this year, but that the shift in monetary policy doesn’t have to be “rushed.”
While markets are pricing in a 97.4% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Jan. 31, the chance of a 25-basis-point cut in the fed-funds rate by March is seen at 57.6%, down slightly from 63.1% on Tuesday, according to the CME FedWatch Tool. Meanwhile, the likelihood of no action in two months is at 40.9%.
In other data releases, U.S. industrial output rose 0.1% in December while capacity utilization held steady. Treasury will auction $13 billion of 20-year bonds at 1 p.m. Eastern time.
What strategists are saying
“Retail sales in December surprised on the upside,” said Ian Lyngen, a rates strategist at BMO Capital Markets.
“This report will support Q4 growth expectations and function as a further pushback against March Fed cut expectations,” Lyngen wrote in a note. Treasurys “are weaker in the wake of the data, with the 2-year sector as the decided underperformer.”
