Yields fall as retail sales reflect weak economy

NEW YORK: US Treasury yields fell on Friday as retail sales data came in below economists' expectations and new fiscal stimulus plans by US President-elect Joe Biden largely met expectations.

Yields jumped ahead of Biden's announcement late on Thursday that he will seek $1.9 trillion from Congress to jump-start the economy and accelerate the distribution of vaccines to bring the coronavirus under control.

But they came back down following the announcement and dropped further after data on Friday showed worse than expected retail sales for December, as renewed measures to slow the spread of COVID-19 undercut spending at restaurants and reduced traffic to shopping malls.

Retail sales dropped 0.7% last month, the Commerce Department said. Data for November was revised down to show sales declining 1.4% instead of 1.1% as previously reported. Economists polled by Reuters had forecast retail sales unchanged in December.

"This morning's disappointing retail sales figures reinforced the idea that more stimulus will be needed," said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

The rate increases earlier this week likely went too far given that "we have a global pandemic, we have the Fed continuing the buy bonds, we have weak economic data," Lyngen added.

Benchmark 10-year yields fell to 1.099%, from 1.138% on Thursday before Biden's announcement. They are down from a 10-month high of 1.187% reached on Tuesday.

The yield curve between two-year and 10-year notes flattened to 95 basis points. The yield gap has compressed from 103 basis points on Tuesday, which was the steepest since May 2017.

Inflation expectations were little changed on the day with 10-year Treasury Inflation-Protected Securities (TIPS) pricing in average inflation of 2.09% per year for the next decade.

Yields spiked earlier this week as the Treasury Department prepared to sell new long-dated debt and on concerns that an improving economic outlook will prompt the Fed to reduce its record bond buying.

But they have fallen since Tuesday after the 10-year and 30-year auctions saw strong investor demand and as Fed speakers said the economy will continue to need strong support for years.

With the US economy still far from its inflation and employment goals it is too early for the Federal Reserve to discuss changing its monthly bond purchases, Fed Chair Jerome Powell said Thursday.

The Treasury will sell $24 billion in 20-year bonds on Wednesday and $15 billion in 10-year TIPS on Thursday.