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Treasuries Rise After Weak Retail Sales Back Fed Rate Cuts

(Bloomberg) -- Treasuries rose, sending 10- and 30-year yields to their lowest levels of the past month, after weak retail sales data bolstered expectations for at least two Federal Reserve interest-rate cuts this year.

The first of this week’s several major US economic data releases showed a loss of consumer spending momentum at the end of the holiday-shopping season, reflecting anxiety about the cost of living and slowing job growth.

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Yields across maturities declined by at least two basis points, the benchmark 10-year note’s by more than five basis points to 4.15%, the lowest level since Jan. 15.

“Although it’s hard to read too much into one data point, this bolsters the case for the doves,” said Subadra Rajappa, head of US rates strategy at Societe Generale. “We’ve gotten used to upside surprises in growth and the outlook for the consumer might not be as rosy.”

Money markets boosted to around 30% the odds of three quarter-point interest rate cuts this year, with two already fully priced in. Swaps still imply policymakers will leave rates on hold when they meet next month, however, as they did in January when they voted to keep them at 3.5% to 3.75%.

Shorter-maturity yields — though more sensitive to expectations for Fed rate actions — declined less ahead of a $58 billion auction of three-year notes at 1 p.m. New York time, the first of three Treasury note or bond sales this week. The auction was indicated to draw a yield of about 3.53%, lower than monthly three-year note sales results since September.

US retail sales were flat in December. The median economist estimate in a Bloomberg survey was for a 0.4% increase. Eight of its 13 categories posted declines. Economic releases ahead this week include January employment, delayed from last week by a government shutdown.

On Monday, National Economic Council Director Kevin Hassett said lower US jobs numbers can be expected in the months ahead. Growth in nonfarm payrolls has already slowed over the past five years from levels and declined

“Given the shift in expectations, tomorrow’s payrolls will get even more attention, but it would have significantly disappoint expectations to push the two-year yield below the roughly 3.4% to 3.65% range that has held since the start of September,” said John Canavan, lead analyst at Oxford Economics.

Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, both regarded as monetary hawks who are also voting on interest-rate policy this year, are slated to speak later Tuesday.

This week’s Treasury auctions include 10- and 30-year new issues over the next two days.

--With assistance from Miles J. Herszenhorn and Michael MacKenzie.

(Adds retail sales data and comment and updates yield levels.)