* Yield curve steepest since July 1
* Prices briefly rally on weak retail sales data
* Traders reduce expectations of September rate hike
By Karen Brettell
NEW YORK, Sept 15 The U.S. Treasury yield curve
was at its steepest in two-and-a-half months on Thursday after
U.S. retail sales fell more than expected in August, further
reducing the odds that the Federal Reserve will raise interest
rates when it meets next week.
The Commerce Department said retail sales declined 0.3
percent after an upwardly-revised 0.1 percent gain in July.
Retail sales in July were previously reported to have been
"The data was weaker than expected, especially retail sales,
which I think the market was focusing on," said Gary Pollack,
head of fixed-income trading at Deutsche Bank Private Wealth
Management in New York.
"That has implications for monetary policy and reduces the
chances that the Fed will raise rates in September," Pollack
Futures traders are now pricing in only a 9-percent change
of a rate increase this month, down from 15 percent on
Wednesday, according to the CME Group's FedWatch Tool.
Other data on Thursday showed that the U.S. current account
deficit narrowed in the second quarter as exports and income
from abroad rose.
Jobless claims also rose in the latest week, while producer
prices were unchanged in August.
Expectations that the Fed will wait longer to raise rates is
causing the long bond to underperform as lower rates are likely
to increase inflation further in the longer-term, which erodes
the value of the debt.
The yield curve has also steepened on concern that the Bank
of Japan will purchase fewer long-term bonds.
The BOJ is studying options to steepen the yield curve to
help prompt new lending by banks that have been hurt by low
The gap between five-year note yields and 30-year bonds
yields widened to 128 basis points, the steepest
since July 1.
Benchmark 10-year notes fell 5/32 in price to
yield 1.71 percent, up from 1.69 percent on Wednesday.
(Editing by Nick Zieminski)