U.S. Government Bonds Strengthen on Slack Retail Sales

By Min Zeng 

        An unexpected decline in U.S. retail sales boosted demand for ultrasafe U.S. government debt on Tuesday, sending bond prices higher for the first time in four days.
        In late-afternoon trading, the yield on the benchmark 10-year Treasury note was 2.401%, compared with 2.43% on Monday. Bond yields fall as prices rise.
        The setback for consumer spending raised questions over how robustly the U.S. economy is improving after a soft patch earlier this year, potentially complicating the Federal Reserve's plan in raising short-term interest rates this year.
        Fed Chairwoman Janet Yellen is scheduled to hold her semiannual testimony before lawmakers on Wednesday and Thursday. Ms. Yellen said last Friday that the central bank is on track to raise interest rates later this year.
        Analysts and traders said Tuesday's releases bolstered the case that the Fed may need to wait for more data to gauge the health of the economy before raising rates, attracting buyers into the bond market.
        A rate increase in "September is unlikely unless spending really snaps back," said Mary Ann Hurley, vice president of trading in Seattle at D.A. Davidson & Co.
        Despite the slide, the 10-year Treasury yield remains near the highest level since September. U.S. bond yields have risen over the past few months after a decline during the first quarter. Investors have been shedding bondholdings due to concerns that a shift in the Fed's monetary policy may shrink the value of outstanding bonds.
        Many investors don't expect bond yields to rise significantly, citing a moderate pace of the economic growth, contained inflation threats and Fed officials' signal to be gradual in raising rates.
        Meanwhile, Greece's debt crisis and the weekslong turmoil in China's stock market have generated swings in financial markets. Analysts say these factors may continue to fuel volatile trading compounded by uncertainties over the Fed's timing to raise rates.
        Ms. Yellen in a speech Friday played down the potential fallout from Greece's debt crisis and China's stock market turmoil on the U.S. growth outlook.
        Fed-funds futures, used by investors and traders to place bets on central bank policy, showed Tuesday that investors and traders see a 16% likelihood of a rate increase at the September 2015 meeting, according to data from the CME Group. The odds had fallen to 13% right after the retail sales release, compared with 16% before the report.
        The odds for a rate increase at the December 2015 meeting were 50%, compared with 53% before the data.
        The yield on the two-year Treasury note, among the most sensitive to change in the Fed's rate policy outlook, fell to 0.641% Tuesday from 0.669% Monday.
        "The market has already moved the timing of a rate increase from September to December, so if we get more weak data we may be moving the expectation out to 2016," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
        Bond yields had climbed in the previous sessions as fears over Greece and China pulled back. Eurozone leaders reached a tentative debt deal Monday to keep the cash-strapped nation in the eurozone. But in exchange for fresh funding, Greece's Parliament later this week has to pass pension overhauls and sales-tax increases that voters overwhelmingly rejected in a referendum just one week ago.
        Meanwhile, China's benchmark equity index fell on Tuesday after a three-day rally. Investors are keeping an eye on whether the market can stabilize from the recent turmoil amid a flurry of actions by China's authorities aiming to shore up confidence.
        Write to Min Zeng at min.zeng@wsj.com
        (END) Dow Jones Newswires

        July 14, 2015 15:44 ET (19:44 GMT)

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