US Treasury yields edged lower on Friday, with all maturities posting weekly declines, after weaker-than-expected US housing data fuelled doubts that the Federal Reserve will be able to raise interest rates again this year. US housing starts dropped 5.5 percent to a seasonally adjusted annual rate of 1.09 million units in May, the Commerce Department said on Friday. That was the lowest since September 2016. Economists polled by Reuters had forecast groundbreaking activity rising to a rate of 1.22 million units.
Analysts said the data compounded concerns about the underlying health of the US economy after government figures on inflation and retail sales for May, released on Wednesday, fell well short of market expectations. The data also reinforced traders' doubts, analysts said, that the Fed would be able to hike interest rates again this year, as the US central bank projected Wednesday, when it raised rates for the second time in 2017.
"If housing is weak, then economic growth is going to be weaker, too," said Stan Shipley, fixed income strategist at Evercore ISI in New York. "The Fed may be a little more cautious hiking in that environment." Benchmark 10-year Treasuries were last up 2/32 in price to yield 2.155 percent, compared with 2.162 percent late Thursday. Two-year Treasuries were last up 2/32 in price to yield 1.319 percent, compared with 1.355 percent late Thursday.
Traders are particularly concerned about soft US inflation readings, which have been viewed as an obstacle to the Fed's plan, outlined on Wednesday, to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, while raising rates for a third time this year.
"Really, what's causing the markets to be somewhat skeptical of the Fed's hiking path is that inflation has been trending downwards," said Praveen Korapaty, global head of rates at Credit Suisse in New York. "There is some weakness in other data as well, but from my perspective the critical thing is the trajectory of inflation." Korapaty said, however, that he expects inflation to recover and that Credit Suisse expects the Fed to start paring its balance sheet in September and increase rates again in December. Yields on Treasuries maturing between two and 30 years posted weekly declines after rising the previous week, with benchmark 10-year yields falling about four basis points for the week.
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