TREASURIES-Yield curve flattens on stronger U.S. economic data

(New throughout, updates prices and market activity)
    * Retail sales beat expectations
    * Two, 10-yr yield curve flattest in two months
    * Yields fall after briefly rising on data

    By Karen Brettell
    NEW YORK, May 13 (Reuters) - The U.S. yield curve flattened
to the lowest levels in two months on Friday after data showed
U.S. retail sales rose the most in a year in April, suggesting
the economy was regaining momentum after growth almost stalled
in the first quarter.
    The Commerce Department said retail sales jumped 1.3 percent
last month, the largest gain since March 2015. This March's
retail sales were revised up to show a 0.3 percent decline
instead of the previously reported 0.4 percent drop.
    "Across the board it was stronger than anticipated," said
David Ader, head of government bond strategy at CRT Capital in
Stamford, Connecticut.
    Short- and intermediate-dated debt underperformed long-dated
bonds after the data, putting the two-year, 10-year yield curve
at its flattest levels since March 8. The yield curve
 flattened to 94.5 basis points, from 97 basis
points before the data was released.
    The curve has flattened since Boston Federal Reserve
President Eric Rosengren, a voting member this year on the Fed's
rate-setting committee, said on Thursday that the market is too
pessimistic about the economy and the likelihood of further
    "Rosengren was somewhat hawkish that started the flattening
of the curve that has continued today," said Dan Mulholland,
head of Treasuries trading at Credit Agricole in New York.
    Longer-dated debt was also well bid as stock and oil prices
declined and German sovereign debt rallied.
    Treasury yields have fallen for the past two-and-a-half
weeks on concerns about slowing global growth and tepid
    Benchmark 10-year notes rose 16/32 in price on
Friday to yield 1.71 percent, down from 1.76 percent on
Thursday. The yields have fallen from 1.94 percent on April 26.
    Investors and Fed officials have starkly different
expectations of economic growth, with most Fed officials
pointing to the likelihood of further rate hikes this year while
market pricing indicates an increase will not occur until early
    "The Fed universally has been at a disconnect with the
market for a very, very long time," said Ader. "The market has
been much more prescient in terms of anticipating the Fed."
    U.S. producer prices also rose in April as energy prices
increased, but a marginal gain in the cost of services pointed
to a moderate increase in inflation in the coming
    U.S. business inventories rose more than expected in March
as automobiles recorded their biggest increase since 2013,
suggesting that the first-quarter's weak economic growth
estimate could be revised higher. 

 (Editing by Meredith Mazzilli, Dan Grebler and David Gregorio)