US Treasuries prices slid on Thursday after a surprisingly strong US retail sales report seemed to boost chances for the Federal Reserve to raise interest rates this year. US short-term interest-rate futures shifted to fully price in a 50-basis-point US interest-rate rise by October, while the two-year Treasury note's yield topped 3 percent, the highest level since early January.
The benchmark 10-year note's yield, which moves inversely to its price, surged to 4.23 percent, the highest level since late December, on unexpectedly strong US retail sales in May and concern about broad impact of food and energy inflation. Worries that inflation will diminish the long-term value of fixed-income instruments like Treasuries could soon send 10-year yields into the 4.25- to 4.30-percent range, said Jefferies & Co strategist John Spinello in New York.
On Thursday, 10-year Treasury notes fell 1-6/32 in price for a yield of 4.23 percent, versus 4.08 percent late Wednesday and 3.93 percent on Friday when a big jump in the US unemployment rate made a Fed rate hike look like a more remote possibility. The biggest blow to Treasuries came from news that US retail sales jumped 1.0 percent in May, challenging the notion that US consumers, beset by falling housing prices and a weak job market, were too bereft to drive any economic growth.
"Consumers, apparently, have an element of resilience," said Michael Moran, chief economist at Daiwa Securities America in New York. Besides the jump in May, results in March and April were revised upward by the equivalent of 0.9 percentage points, leaving sales on a firm upward trend, he said.
One more declaration from a Fed official about the need to control inflation also weighed on Treasuries. Philadelphia Fed President Charles Plosser said US monetary policy was quite accommodative and that inflation was on people's minds. "We have to take appropriate steps to do something about that," Plosser told CNBC television.
Of late, monetary authorities have recognised consumers' worries about rising prices and have hinted that official rate increases might be needed to restrain those expectations. Josh Stiles, senior bond strategist at IDEAglobal, said the speeches and comments from Fed officials regarding inflation were only talk, so far.
The 2-year note, which is particularly sensitive to expectations for Fed rate moves, fell 14/32 in price for a yield of 3.05 percent, the highest level since early January. The highly inflation-sensitive 30-year Treasury bond fell more than a full point in price, its yield rising to 4.78 percent from 4.70 percent on Wednesday.
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