US Treasury debt prices fell on Friday after stronger-than-anticipated July retail sales revived speculation that the Federal Reserve might resume raising interest rates.
Government debt prices posted a weekly loss for the first time in six weeks. Bond yields are near the bottom of their current ranges and some market participants took profits ahead of the weekend, strategists said.
Treasuries have treaded water since the Fed paused in its two-year campaign of rate increases on Tuesday and hinted in its accompanying statement that inflation pressures might not trigger more monetary policy tightening, for now.
While some economists have speculated that the Fed would not raise rates in September for fear of rattling markets, US short-term interest rate futures showed about a 42 percent perceived chance of a rate increase at the Fed's September meeting after the retail sales data was released. That figure slipped to close at 36 percent, compared with about 30 percent late on Thursday.
"I don't think it is overly surprising you have seen a little bit of selling pressure in Treasuries here, with retail sales stronger than expected," said Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley in Purchase, New York.
"In terms of future price action and what you are anticipating that the Fed may or may not do, you have to look at the third quarter to see if that moderation in growth is sustained. So far, what you are seeing is that consumer spending is lending support" to growth, Flanagan added.
Benchmark 10-year notes fell 9/32 in price for a yield of 4.98 percent, up from 4.94 percent late on Thursday. Bond yields and prices move inversely. US retail sales rose 1.4 percent in July, above economists' forecasts for a 0.8 percent rise.
"It's a very solid report. It certainly suggests that consumers continue to sort of weather the increase in gasoline prices and some of the global uncertainty that we saw in July," said Michelle Girard, senior economist at RBS Greenwich Capital in Greenwich, Connecticut.
"These kinds of numbers that show the economy is stronger remind the market that the Fed may in fact not be finished and you see that reflected in prices, whether you're looking at the eurodollar curve, whether you're looking at the Treasury market, you see the markets sort of adjusting to that reality," Girard said.
But strong economic growth numbers may not force the Fed to raise rates again because the central bank may have changed its view for an acceptable range for inflation, said Richard Berner, chief US economist at Morgan Stanley in New York.
"I think that the Fed may implicitly be choosing a slightly higher inflation objective than previously thought - perhaps 1.5 to 2.5 percent," said Berner in a note. "The cost of reducing inflation seems to have increased, and the current presumed 1 to 2 percent 'comfort zone' may leave too little margin for error and for disinflationary shocks."
If the Fed is considering an upwardly adjusted range, Berner said, it should communicate that to the market. In other economic news, a gauge of future US economic growth turned negative for the first time in more than a year, lending support to the Fed's view that growth will slow. Annualised growth in the Economic Cycle Research Institute's weekly leading index fell to negative 0.4 percent.
But import prices - a gauge of inflation pressures coming into the US economy - rose 0.9 percent in July, compared with economists' expectations for a rise of 0.8 percent.
"Inflation expectations have been rising recently and remain elevated," as reflected in 10-year TIPS break-even spreads, as well as in unit labour costs, said Tony Crescenzi, chief bond market strategist with Miller, Tabak + Co Two-year notes fell 2/32 in price to yield 4.97 percent, compared with 4.94 percent late on Thursday.