May 15, 2019 / 2:00 PM / a month ago

TREASURIES-Two-year yield hits 15-month low after weak retail data

(Adds details, analyst quote; updates yields)

By Kate Duguid

NEW YORK, May 15 (Reuters) - Treasury yields fell on Wednesday morning, with the two-year yield at its lowest in 15 months as traders raised bets on a Federal Reserve rate cut after U.S. retail sales missed expectations.

The two-year yield, which is a proxy for market expectations of Fed interest rate policy, fell as low as 2.139%, breaking through late-March levels to its lowest since February 2018. It was last down 5 basis points at 2.153%.

U.S. retail sales unexpectedly fell in April as households cut back on purchases of motor vehicles and a range of other goods, which could temper expectations for a sharp rebound in consumer spending after it slowed in the first quarter, the Commerce Department reported Wednesday.

The data added to ongoing “growth concerns, and market participants are continuing to price in the Fed cutting rates whether it’s late this year or early next year,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald.

“Obviously, the Fed is not there yet,” he said. “But the market is definitely, between data and trade concerns and global growth, pricing in a Fed rate cut.”

Expectations that interest rates will be at current levels in December 2019 were at 21.8%, down from 30% yesterday, according to CME Group’s FedWatch tool. Approximately 40.1% of traders are pricing in one rate cut by the end of the year, with 27.7% expecting rates to be 50 basis points lower than where they currently stand by then.

By January 2019, expectations that rates will be unchanged from today are just 17%.

The Fed put its rate-hiking policy on pause earlier this year after volatility roiled financial markets in December. Since then, U.S. economic data has been mixed, with Wednesday’s retail sales another indication of slowing growth.

The rally in Treasury prices began overnight with weak economic data out of China, which was then pushed further by Italian political disarray and a fall in German bunds. Treasuries, along with safe-haven assets such as the Japanese yen and the Swiss franc, benefited from the increased instability.

China reported April retail sales growth fell to a 16-year low, which, coupled with an unexpected fall in industrial output, adds more pressure on Beijing to roll out more stimulus as the trade war with the United States escalates.

The benchmark 10-year yield was last down 4.9 basis points at 2.370%, with the biggest gains in the three-, five-, and seven-year note yields all up just under 6 basis points. (Reporting by Kate Duguid; Editing by David Gregorio, Susan Thomas and Jonathan Oatis)

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