U.S. Government Bonds Pull Back On Costumer Spending

        U.S. Treasury bonds pulled back on Thursday for the first time in three days as a solid U.S. consumer spending report renewed concerns of a potential interest-rate increase by the Federal Reserve next month.
        A $16 billion sale of 30-year Treasury bonds drew average demand on Thursday, contributing to the price decline.
        In recent trading, the yield on the benchmark 10-year Treasury note was 2.184%, according to Tradeweb, compared with 2.134% on Wednesday, which was the lowest closing level since May 29. Yields rise as prices fall.
        Investors had piled into U.S. government debt after China on Tuesday surprised investors by devaluating its currency, which heightened concerns over the world's second-largest economy and its potential ramifications globally.
        A weaker yuan has sent many emerging-countries currencies and commodities tumbling and has pushed the U.S. dollar higher. A stronger dollar hurts the U.S.'s competitiveness in global trade, while reducing the prices of imported goods and inflation expectations.
        On Thursday, concerns over China eased after Chinese central bank officials ruled out a significant decline in the yuan and said that China has the financial firepower to defend the currency as needed.
        Meanwhile, the latest retail sales report continued to show an improving U.S. economy, which leaves the door open for the Fed to act at its Sept. 16-17 monetary policy meeting.
        Retail sales rose a seasonally adjusted 0.6% in July from a month earlier, the Commerce Department said Thursday. Sales were flat in June after climbing briskly in May. Excluding cars, sales rose 0.4% in July, the third consecutive month of solid gains.
        "We are back to looking at the U.S. economy and it looks healthy and moving quickly to meet the Fed's goals for employment and growth," said Thomas Roth, executive director in the U.S. government bond trading group at Mitsubishi UFJ Securities (USA) Inc. in New York. "Unfortunately the rest of the world is not so good so it is hard for the market to determine how it all adds up in Fed Chairwoman Janet Yellen's head."
        Fed-funds futures showed on Thursday that investors and traders see a 45% likelihood of a rate increase at the September meeting, up from 39% on Wednesday, according to data from the CME Group.
        The yield on the two-year note, among the most sensitive to changes in the Fed's interest-rate outlook, was 0.701%, compared with 0.657% on Wednesday. The yield is trading near the highest level of the year.
        "A rate hike in September is still on the table," said Gene Tannuzzo, senior fixed income portfolio manager at Columbia Threadneedle Investments, which has $503 billion assets under management.
        Mr. Tannuzzo said he has sold Treasury debt from the recent rally and invested into high-grade corporate bonds, which offer more attractive yields. He expects the 10-year yield to rise to 2.65% at the end of December.
        Many investors aren't convinced that the U.S. economy is strong enough for the Fed to raise rates. They are worried that if the central bank increases rates prematurely, it could hurt the U.S. growth outlook.
        U.S. long-term bond yields have tumbled this quarter after a rise between April and June, as investors and policy makers world-wide grapple with sluggish global economic growth, plunging commodities prices and very low inflation.
        Lower Treasury yields are confounding many investors and analysts who had expected the 10-year yield to rise toward 3%. The prospect of higher interest rates from the Fed, they have said, would shrink the value of outstanding bonds whose prices had climbed in recent years thanks in part to the Fed's monetary stimulus.
        Softer commodities and a stronger dollar reduced inflation fears. Inflation is a main threat to the value of long-term bonds. As inflation concerns ease, the allure of holding long-term Treasury debt increases.
        A gauge of 10-year inflation expectations in the U.S. fell on Thursday to the lowest level since January. On Thursday, a report showed import prices decreased 0.9% in July from a month earlier. From a year earlier, import prices were down 10.4%.
        Write to Min Zeng at min.zeng@wsj.com
        (END) Dow Jones Newswires

        August 13, 2015 13:50 ET (17:50 GMT)