(Bloomberg) — Treasuries moved higher as stronger-than-expected retail sales failed to derail bets that the Federal Reserve is set to begin a series of interest-rate cuts to support the sagging labor market.
Yields on two-year notes — which closely track changes in monetary policy — fell as much as three basis points while 10-year yields dipped less than two basis points to 4.02% Tuesday morning in New York.
Stronger-than-expected August retail sales data briefly sent yields to their highest levels of the day. The data underscored that the rate cut expected to result from the two-day Fed meeting on interest rates that began this morning in Washington is unlikely to exceed a quarter point, or 25 basis points. Policymakers a year ago cut rates by a half point, or 50 basis points, to begin unwinding the steep rate increases of the previous two years.
“I don’t think this really changes the Fed equation a lot. They’re going to go 25, and the odds of 50 were a very, very long shot,” said Jan Nevruzi, interest-rate strategist at TD Securities. “Underlying momentum is not crashing, and if you were banking on large rate cuts due to slowing data today, you’re simply not getting that confirmation.”
Retails sales rose in August for a third straight month, led by sales from online retailers, clothing stores and sporting goods.
“The consumer is being resilient and still spending,” Kristina Campmany, senior portfolio manager at Invesco, said on Bloomberg Television.
Still, 10-year yields have declined more than 30 basis points since late July after a series of jobs reports signaled hiring has been slowing.
That’s reinforced wagers that the Fed is poised to start reducing borrowing after a nine-month pause during which policymakers have held the policy rate steady in a range of 4.25% to 4.50%.
Interest-rate swaps tied to Fed meeting dates anticipate about 70 basis points of reductions by the end of the year.
“The Fed’s in a good position, if we continue to see softening in the labor market, to continue to remove accommodation for the remainder of the year,” said Sean Simko, head of fixed income investment management at SEI Investments Corp. “The challenge over the last couple of quarters is inflation, which has come down but remains sticky in pockets.”
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