* Yield curve steepest since June 27
* Traders reduce expectations of September rate hike
* Bank of Japan jitters weigh on long-dated bonds
By Karen Brettell
NEW YORK, Sept 15 The U.S. Treasury yield curve
surged to its steepest levels in 2-1/2 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 amid weak purchases of automobiles and a range of other
goods, after an upwardly-revised 0.1 percent gain in July.
"The data was weaker than expected," 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
Futures traders are now pricing in only a 12 percent chance
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 the labor market continuing to
tighten with layoffs remaining very low last week, and
underlying producer inflation creeping up in August.
Consumer price inflation data on Friday is the next economic
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 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 Bank of Japan and Fed will both conclude their September
meetings next Wednesday.
U.S. benchmark 10-year Treasury notes fell 4/32
in price to yield 1.70 percent, up from 1.69 percent on
The gap between five-year note yields and 30-year bonds
yields widened to 130 basis points, the steepest
curve since June 27.
(Editing by Nick Zieminski and Cynthia Osterman)