US government bonds rallied on Wednesday after surprisingly weak retail sales data reminded investors of the rocky road to recovery for an economy mired in its worst recession in decades. US retail sales fell for a second straight month in April, confounding economists' expectations they would hold steady and casting some doubt on expectations that an economic tailspin may be waning.
This sent Treasuries higher, pushing the 30-year bond up more than a full point on the day. The data boosted the allure of safe-haven Treasuries at the expense of equities, which had been rallying for two months on hopes that the recession was nearing an end.
"Certainly stocks are lower, and the really horrible retail sales numbers are making people think we may not be on the recovery path that so many thought we were on," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.
The benchmark 10-year Treasury note traded 17/32 higher in price for a yield of 3.12 percent, down from 3.18 percent late on Tuesday. The yield hit 3.09 percent on Wednesday, marking the lowest since the end of April. The 30-year long bond traded 1-9/32 higher to yield 4.09 percent from 4.17 percent at Tuesday's close.
Trading volume overall on Wednesday was very high, driven mostly by Treasury bills, while trading of benchmark notes was below average, according to data from Tradeweb. US retail sales last month slipped 0.4 percent after falling 1.3 percent in March. Data also showed a record 16.3 percent year-on-year drop in import prices, despite a rise on a monthly basis, highlighting global deflationary pressures influencing the United States as falling demand cuts prices.
The soft, non-inflationary tone of the day's numbers supported a bond market that had recently seen a steep sell-off on worries about the growing US public debt and hopeful signs that the economy was starting to bottom out. "With these overwhelmingly soft retail sales numbers, this is taking the wind from the sail of the recent Treasuries sell-off," said Guy LeBas, fixed income strategist at Janney Montgomery Scott in Philadelphia.
"The retail sales report is a re-acknowledgement we are in the midst of a recovery but it will be a slow one. It took us a long time to dig ourselves into this situation, and it will take time to dig ourselves out." The bond market is also enjoying a two-week break from this year's heavy slate of debt issuance. The next scheduled auction of coupon securities is not until the May 26 sale of two-year Treasury notes.
The Treasury said in April that it expects net new issuance of $2 trillion in fiscal-year 2009, which ends on September 30, a huge jump from $700 billion in fiscal 2008. Two-year notes traded 1/32 higher, pushing yields down to 0.88 percent from 0.90 percent on Tuesday, while five-year notes traded 7/32 higher for a yield of 1.97 percent from 2.02 percent.
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