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TREASURIES-U.S. yields slide on soft retail sales; market awaits Fed
December 14, 2016 / 4:22 PM / a year ago

TREASURIES-U.S. yields slide on soft retail sales; market awaits Fed

* U.S. retail sales slip in November, push Treasury yields lower

* BoJ move earlier weighs on U.S. yields

* Focus on Fed decision, market widely expects rate hike (Updates prices, adds comment, U.S. data, byline, table)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 14 (Reuters) - U.S. Treasury yields fell on Wednesday, pressured by lackluster retail sales last month that suggested the economy’s performance in the fourth quarter may not be as strong as people thought.

That said, the weaker-than-expected U.S. retail sales number did not shake expectations that the Federal Reserve will raise interest rates by a quarter percentage point later on Wednesday.

Data showed U.S. retail sales barely rose in November as households cut back on purchases of motor vehicles. The October figures were also revised lower.

“The surprise retail sales both in terms of November and the October revisions were the catalyst for what we have seen in the market,” said Jim Vogel, interest rates strategist, at FTN Financial in Memphis, Tennessee.

“And now we’re going to have to deal with whether it makes any sense to push the 10-year to 2.40 percent before the Fed decision,” he added.

Going into the Fed policy meeting outcome later in the session, the market is anticipating an optimistic U.S. central bank, based on interest rate expectations next year. The market has priced in two to three rate hikes in 2017, which was too upbeat for FTN’s Vogel.

Vogel said FTN is pricing just one to two rate increases.

“We think there could be relative weakness next year compared with expectations as people wait to see more detail and the possible timing from all the things that people have gotten so excited about the last six weeks,” Vogel said.

The big question though for Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York, is whether 2.50 percent in 10-year yields will hold in the face of a second rate hike and what he expects to be a hawkish statement from the Fed.

Since President-elect Donald Trump’s victory, the 10-year yield has gained about 75 basis points.

In late morning trading, benchmark 10-year Treasury prices were up 13/32, yielding 2.433 percent, down from 2.48 percent late on Tuesday.

U.S. 30-year bonds were up 31/32, with a yield of 3.095 percent, compared with Tuesday’s 3.146 percent.

U.S. long-dated yields were also undermined earlier by the Bank of Japan’s move to increase government bond purchases in regular market operations, the first time since it adopted its yield-curve control back in September.

The move pushed long Japanese government bond yields lower as well as the yen. U.S. bond yields fell in tandem.

U.S. two-year notes, meanwhile, were flat, yielding 1.161 percent. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama)

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