U.S. Treasury yields and inflation expectations rose on Tuesday after data showed that U.S. retail sales increased more than expected in October. The gains came as Americans likely started their holiday shopping early to avoid empty shelves amid shortages of some goods because of the ongoing pandemic -- giving the economy a lift at the start of the fourth quarter.
Retail sales surged 1.7% last month, the Commerce Department said. Data for September was revised higher to show retail sales increasing 0.8% instead of 0.7% as previously reported. Sales have now risen for three straight months. The data is “continuing to suggest the economy is recovering quite quickly, and leaning against the Fed’s notion that inflation may be transitory,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
TIPS Now at 3.24%
Yields have jumped since data last Wednesday showed that U.S. consumer prices posted their biggest gain in 31 years in October. Federal Reserve officials including Chairman Jerome Powell have maintained that inflation is transitory and likely to moderate next year. Benchmark 10-year notes were last at 1.63%, up from 1.61% before the data was released. Breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS) rose to 3.24%, the highest level since the notes were introduced in 1997.
Bonds had rallied overnight as concerns about a rise in COVID-19 cases increased demand for the safe haven debt.
“Risk sentiment is at risk of worsening into year-end as COVID-19 cases build. This means a flatter curve, all else being equal,” analysts at ING said in a note issued Tuesday. Supply may offset some of that demand, however, with companies expected to sell debt before market liquidity is reduced during the end of year holiday season.
Actions by the Treasury & the Fed
The Treasury on Wednesday will also sell $23 billion in new 20-year bonds, after seeing very weak demand for a $25 billion auction of 30-year bonds last week. Twenty-year bond yields are trading above those offered on 30-year bonds as the tenor continues to suffer from relatively lower demand than other maturities. The 20-year bond yields were last at 2.04% while 30-year yields were at 2.01%.
The Fed is also beginning to reduce the size of its bond purchase program, which analysts say could push yields higher.
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