Treasuries outlook: bond prices gain sharply on weak data

US Treasury prices rallied on Friday after weaker-than-expected economic data added to skepticism about the strength of the US economy and as plunging oil prices shook global equity markets, increasing investor appetite for safe-haven US government debt. Treasury prices rose after the Commerce Department said retail sales fell 0.1 percent in December, driving the yield on the benchmark US 10-year Treasury note to a three-month low of 1.986 percent. The yield on the 30-year bond dropped to 2.798 percent, the lowest in more than three months.
A key part of the data showed a 0.3 percent drop in sales excluding automobiles, gasoline, building materials and food services in December after advancing 0.5 percent the prior month. "Retail sales went wrong and there is an overwhelming sentiment that economic activity is slowing," said Sharon Stark, chief fixed income strategist at D.A. Davidson & Co in St. Petersburg, Florida.
Other data showed 2015 producer prices fell to their lowest since 2010 as energy prices dropped, which could leave inflation unchanged or cause it to fall. Low inflation and moderate US growth are seen as factors that could hold the Fed back from aggressive rate hikes this year. The day's disappointing economic reports came a day after data showed import prices tumbled in December for a sixth straight month, also weighed down by lower oil prices and a strong dollar.
Treasury prices also gained on continued weakness in stocks, which were dragged down by the plunge in crude, with oil prices diving below $30 a barrel, sending fresh tremors through financial markets globally. "No matter where you look, from commodities and FX, to equities there is no appetite for risk," said Stark. "Investors are looking for a place to go and they're turning to the safe haven of Treasuries."
Falling oil prices suggest inflation will remain subdued, which benefits longer-dated Treasury prices while higher inflation hurts longer-dated Treasuries as it erodes the value of interest rate payouts. Benchmark 10-year notes were last up 21/32 in price to yield 2.026 percent, down from 2.098 percent late on Thursday. The 30-year bond rose 1-24/32 in price to yield 2.805 percent, down from 2.892 percent on Thursday.