Bond Report: Treasury yields stay depressed after retail sales fall

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U.S. Treasury yields fell Wednesday after lackluster data on retail sales suggested that weakness in manufacturing may be spilling over into other areas of the U.S. economy.

What are Treasurys doing

The 10-year Treasury note yield TMUBMUSD10Y, -1.43% slipped 2.3 basis points to 1.750%. The 2-year note rate TMUBMUSD02Y, -2.01%   shed 3.2 basis points to 1.589%, while the 30-year bond yield TMUBMUSD30Y, -0.35%  was unchanged at 2.238%.

What’s driving Treasurys?

Weak economic data grabbed the attention of investors following the release of fresh data showing retail sales for September fell 0.3%, its first drop in seven months. Economists polled by MarketWatch had forecast an 0.3% increase.

Investors have kept a close eyed on consumer activity as households have been cited as a key pillar of the U.S. growth engine, powering it through the trade slowdown sweeping across the world. The concern is that if shoppers curtail their spending, the U.S. may be more vulnerable to a recession, fears that stoked appetite for haven assets from Treasurys to precious metals.

In other data, the home builders’ index for October rose to 71, from a reading of 68, thanks to the combination of plunging mortgage rates and slower home price that has put owning a home within reach of more borrowers.

The Federal Reserve’s Beige Book, a survey of anecdotes from business executives, reported that the U.S. economy “expanded at a slight to modest pace,” but emphasized the uneven business activity across the country.

A few central bank officials spoke Wednesday. Chicago Fed President Charles Evans said he was worried about the inflation outlook, and was open to further rate cuts.

Government bonds also rallied as the prospect of a Brexit deal came under question, reversing the selloff in Treasurys seen on Tuesday. Bloomberg News reported that an European Union official said a Brexit agreement would be impossible without further concessions from the U.K. Northern Ireland’s Democratic Unionist Party, while also raising objections to U.K. Prime Minister Boris Johnson’s proposal.

Talks on Brexit likely now run into the start of the European Summit on Thursday. Still, Michel Barnier, the EU’s top negotiator, said he remained optimistic on an agreement.

The 10-year yield for the U.K. government bond, or gilts, TMBMKDE-10Y, +7.79%  was mostly unchanged at 0.711%, Tradeweb data show.

What did market participants’ say?

“How long will consumers be willing to carry the load for the economy? The answer isn’t clear, but cracks are showing,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors.

“Optimism that a Brexit deal is in the grasp of U.K. and EU negotiators was called premature by EU diplomats overnight so it will be tense finale with more twists and turns no doubt on what should be the final day of negotiations in Brussels before the summit tomorrow,” wrote Kenneth Broux, a strategist at Société Générale.

See also: European stocks slip on pessimism over Brexit deal and U.S.-China tensions

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