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US benchmark Treasury yields rose to one-week highs on Tuesday as investors pared low-risk bond holdings on signs of easing US-North Korean tensions and on strong domestic retail sales and regional factory activity data. Since the weekend, Washington and Pyongyang have ratcheted down rhetoric that had ignited fears of an imminent military showdown between the nations. On Tuesday, state media said North Korean leader Kim Jong Un has postponed a missile strike toward the US territory of Guam.
The latest development spurred more Treasuries selling overnight, causing longer-dated yields to rise further from the six-week lows reached last week. "The (safe-haven) rally was really running out of steam. The move accelerated in the wake of the strong retail sales number," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.
US retail sales gained 0.6 percent in July, the biggest monthly increase in seven months, the Commerce Department said. Another encouraging sign was an unexpectedly strong rise in an index on manufacturing activity in New York state from the New York Federal Reserve. The index rose to 25.2 points in August, its highest level since September 2014.
Tuesday's upbeat economic data revived some bets that the Fed may raise interest rates at its December policy meeting, though doubts remain in the wake of a recent string of disappointing inflation readings. "A December rate hike for the Fed is always on the table. That probability goes lower and lower with inflation being softer," said Sean Simko, head of fixed-income management in SEI in Oaks, Pennsylvania.
Minutes from the Fed's July meeting to be released on Wednesday will be watched for clues on when a rate hike is next likely and if the US central bank is likely to announce a reduction in its balance sheet at its September meeting. Interest rates futures implied that traders saw a 55 percent chance the Fed would raise rates in December, compared with about 42 percent late on Monday, CME Group's FedWatch program showed. Benchmark US 10-year Treasuries fell 12/32 in price to yield 2.26 percent, up from 2.2 percent on Monday.

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