Treasury yields higher as traders eye retail sales data

Bond yields rose early Tuesday as investors eyed U.S. retail sales data, and easing geopolitical angst curtailed demand for haven assets.

What’s happening

  • The yield on the 2-year Treasury
    added less than 1 basis point to 5.114%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    rose 4 basis points to 4.752%.

  • The yield on the 30-year Treasury
    climbed 5.1 basis points to 4.904%.

What’s driving markets

Hopes that a trip by U.S. President Joe Biden to the Middle East may help prevent the Israel/Hamas war from causing a wider regional conflagration is helping trim demand for perceived safety plays, such as U.S. Treasuries.

Meanwhile, investors await an update on the health of the U.S. consumer, when the September retail sales report is published at 8:30 a.m. Eastern.

With consumption representing about 70% of the U.S. economy, the snapshot of household spending may impact the Federal Reserve’s thinking on monetary policy.

Federal Reserve officials in line to speak include John Williams, the New York Fed president talking at the the Economic Club of NY at 8 a.m.; and Richmond Fed President Tom Barkin making comments on the economic outlook at 10:45 a.m.

Markets are pricing in a 90% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is priced at 30%. The central bank is not expected to take its Fed funds rate target back down to around 5% until August 2024, according to 30-day Fed Funds futures.

Other U.S. economic updates set for release on Tuesday include the September industrial production and capacity utilization 9:15 a.m., followed by the homebuilder confidence index for October and August business inventories at 10 a.m.

What are analysts saying

“Retail sales data will be closely scrutinized to assess whether U.S. consumers show signs of fatigue. The consensus forecast anticipates a 0.3% increase in the headline figure, with particular attention given to any potential decline in the control group data,” said Stephen Innes, managing partner at SPI Asset Management.

“The recent messaging from the Federal Reserve suggests that the Committee is open to not implementing the final rate hike projected by the dot plot. This willingness to hold off on rate hikes is based on the notion that the substantial repricing of long-term Treasury yields, significantly the 100-basis point increase in the term premium, could be a substitute for an actual rate hike,” said Innes.

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