Benchmark US Treasury yields fell to their lowest level in nearly two weeks on Friday after weaker-than-expected readings on US retail sales and producer prices suggested US inflation could be slowing, cutting expectations for the Federal Reserve to raise overnight interest rates. Retail sales were flat for July, missing economists' expectations for a modest 0.4 percent rise, and producer prices recorded their biggest drop in nearly a year last month on declining costs for services and energy products.
"The relationship is pretty straightforward, with low inflation and low growth comes lower interest rates," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia. Fed fund futures prices on Friday showed investors reduced their bets that the Fed would tighten monetary policy before the end of the year. Traders see a 43 percent chance of a rate hike by the Fed's December meeting, versus a 52 percent chance on Thursday, according to CME Group's FedWatch tool.
Yields on benchmark 10-year Treasury notes fell to their lowest level since August 1 after the data, at 1.48 percent. The 30-year Treasury bond hit its lowest yield since August 5, at 2.21 percent. The 10-year note was last up 16/32 in price for a yield of 1.52 percent, down more than 5 basis points from its late Thursday close. The 30-year Treasury bond rose 1-4/32 in price to yield 2.24 percent, about 5 basis points lower than Thursday's close.
The move lower in yield following the data's release was exaggerated by buying of the Japanese yen, LeBas said. Longer-dated Treasury yields have moved largely in concert with the yen in recent months, dropping as the dollar has declined against the Japanese currency. US Treasuries have attracted more overseas investors as government debt in other developed markets like Japan has moved to yield negative interest rates at maturities up to 10 years. Ten-year Japanese government bonds currently yield -0.101 percent, meaning investors lose money if they hold them to maturity.