U.S. Treasuries Decline as Retail Sales Increased in November
By Elizabeth Stanton and Deborah Finestone
Dec. 13 (Bloomberg) -- U.S. Treasuries fell, pushing 10-year note yields up the most in about six weeks, after the government said retail sales last month increased the most since July, suggesting consumer spending may sustain economic growth.
Two- and 10-year notes gave back all their gains from yesterday, when they rallied after a Federal Reserve statement on interest rates acknowledged recent economic data has been ``mixed.'' Futures traders pared bets the central bank will cut borrowing costs next quarter.
``The market interpreted the Fed statement yesterday as setting things up for a neutral bias in January and opening the door for an ease in March,'' said Irene Tse, head of U.S. Treasury trading in New York at Goldman Sachs, one of the 22 primary government securities dealers that trade with the Fed. ``The number today threw that idea out the door.''
Ten-year note yields, which move inversely to their prices, rose about 8 basis points, or 0.08 percentage point, to 4.56 percent at 11:30 a.m. in New York, according to bond broker Cantor Fitzgerald LP. It's the biggest increase since Nov. 3.
The price of the 4 5/8 percent note maturing in November 2016 fell 19/32, or $5.94 per $1,000 face amount, to 100 15/32.
The yield on two-year notes, more sensitive to changes in monetary policy expectations, rose about 8 basis points to 4.70 percent.
Sales Increase
Sales jumped 1 percent, after a revised 0.1 percent decline in October that was smaller than previously estimated, the Commerce Department said.
The median forecast of economists polled by Bloomberg News was for retail sales to increase 0.2 percent. Purchases excluding motor vehicles rose 1.1 percent, the most since January, compared with a median forecast for a 0.3 percent gain.
``This shows unequivocal strength in consumer spending in November,'' said Kevin Flanagan, a fixed-income strategist for Morgan Stanley in Purchase, New York. ``It doesn't argue for an imminent ease from the Fed, which the market priced itself for.''
Fed funds futures contracts indicate traders see about a 20 percent probability the central bank will reduce rates to 5 percent before April, compared with 28 percent odds yesterday.
The Fed yesterday left interest rates unchanged at 5.25 percent for a fourth straight time.
``Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters,'' policy makers said in a statement accompanying the decision.
The Fed also reiterated that additional rate increases may be needed to contain inflation.
Mortgage Applications
A surge in a weekly index of mortgage applications indicated the worst of the housing slowdown may be over.
U.S. mortgage applications rose to the highest level in more than a year last week as lower borrowing costs spurred home purchases and refinancings, data from the Mortgage Bankers Association released today showed.
The group's index of applications to buy a home or refinance an existing loan rose 11.4 percent to 721.2, the highest since October 2005. The increase followed an 8.1 percent rise in the prior week.
Lower mortgage rates may be providing some cushion for the real estate market. The average 30-year fixed-rate mortgage was 6.02 percent last week, down from a high this year of 6.86 percent in June, according to Freddie Mac.
Bill Gross, manager of the world's largest bond fund, earlier this year said the weekly mortgage applications data were ``critical'' to assessing his view that the Fed will cut interest rates next year in response to a housing-led economic slowdown.
Gross, chief investment officer at Newport Beach, California-based Pacific Investment Management Co., made the comment in an Oct. 13 interview.
Warm Weather
Unseasonably warm weather in November may have contributed to housing market strength that isn't sustainable, said William O'Donnell, head of interest-rate strategy in Stamford, Connecticut, at primary dealer UBS Securities LLC.
``Today's reports show consumption remains robust and the housing market, by some appearances, is stabilizing,'' he said. ``It provides a more moderate picture.''
Today's decline may benefit the Treasury Department when it sells $8 billion worth of 10-year notes. Bids are due at 1 p.m. New York time.
The securities, which mature in November 2016, yielded 4.55 percent in pre-auction trading.
``Dealers will feel very pleased with the outright cheapening in yields today,'' O'Donnell said.
The auction is a reopening, meaning that the notes to be sold will pay interest at the same rate and mature on the same date as the 10-year notes sold in the last auction, making them identical.