NEW YORK, June 14 (Reuters) - Short-dated U.S. Treasury yields jumped on Friday, flattening the yield curve, after data showed a pick-up in consumer spending that subdued investor fears of rapid economic decay in the second quarter.
The upbeat report from the Commerce Department on Friday - which showed retail sales increased in May - followed a raft of weak data, including a step-down in hiring and tame inflation readings that led economists to believe the Federal Reserve would signal an interest rate cut later this year when policymakers meet next week.
“The data does reinforce that the U.S. consumer is still fairly strong. It helped the market breathe a sigh of relief that things are not deteriorating as quickly as many had anticipated,” said Gennadiy Goldberg, interest rates strategist at TD Securities.
Markets have priced in two rate cuts this year, driven primarily by a recent escalation in the trade war between the United States and China.
Federal Reserve Chair Jerome Powell last week said the central bank was watching for economic effects of the trade war and, if necessary, would “act as appropriate.”
The two-year yield, which moves with investor expectations of changes to interest rates, was 1 basis point higher in mid-morning trade to 1.841%. However, the moves across maturities were modest as traders held off from making big moves in advance of the Fed meeting next week.
“Ahead of the Fed, this should push rates a little bit higher, but I just don’t think that rates have that much more room to run given the uncertainty about what happens next week. Markets are still pricing in 25% odds of a cut in June. The odds of a dovish message coming out next week are going to keep rates contained for now,” said Goldberg.
The spread between two- and 10-year yields, a standard measure of the yield curve, narrowed to 24.1 basis points from 25.7 at the prior close. The yield curve had been steepening this week as weak inflation data raised forecasts of rate cuts in 2019.
“Our view is that they open the door to two cuts but they don’t actually walk through it,” said Goldberg.
Also on Friday, U.S. manufacturing output rose in May, the first monthly gain this year, as an increase in the production of motor vehicles and parts countered declines in the making of metals and aerospace equipment. (Reporting by Kate Duguid; Editing by Bernadette Baum)