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Treasurys post another session of declines on healthy December retail report

January 15, 2007 | CNN

Bond prices continued their recent slide Friday following an upbeat reading on retail sales in December, prompting investors to bet that the Federal Reserve will hold off on lowering interest rates in the near term.

The benchmark 10-year note fell 10/32, or $3.12 on a $1,000 note, to yield 4.78 percent, its highest level since late October, up from 4.73 late Thursday.

The 30-year bond fell 19/32 or $5.93 on a $1,000 note to yield 4.86 percent, up from 4.82 the previous session. The five-year note eased 5/32 to yield 4.77 percent, while the two-year note fell two ticks to yield 4.90 percent.

Treasurys turned lower after the release of the Commerce Department's December retail sales report, which came in stronger-than-expected at a 0.9 percent increase, helped by a final burst of last-minute holiday shopping.

Economists surveyed by Briefing.com, on average, had forecast an increase of 0.7 percent for December.

Sales excluding autos and auto parts rose a much stronger-than-expected 1 percent last month, compared with a revised 0.7 percent increase in November. Economists had forecast a 0.5 percent increase.

Treasury prices have fallen over the past week, hurt by a surprising decline in U.S. jobless claims, a larger-than-expected narrowing of the U.S. trade gap and a stronger-than-expected December employment report, issued last Friday.

The latest economic readings suggest there is still some underlying strength in the U.S. economy, which has fueled speculation among investors that the Federal Reserve will not raise interest rates any time soon.

"The whole market is re-estimating when the Fed may ease. It may be on hold for quite awhile," Jim Cusser, portfolio manager at Waddell & Reed Investment Management in Overland Park, Kansas told Reuters.

The Fed has held the target for its key short-term interest rate steady at 5.25 percent at its past four meetings, and minutes from the Fed's latest meeting showed policymakers are still worried about rising prices.

Boston Fed President Cathy Minehan became the latest Fed official to deliver comments this week, saying that she expected the U.S. economy to grow modestly in 2007 and that inflation will remain a challenge for policy-makers, even though it should ease.

U.S. markets will be closed Monday for Martin Luther King Jr. Day, but there is plenty of economic reports on tap next week for bond traders.

The Labor Department will report December's Producer Price Index Wednesday while the Federal Reserve's "beige book" survey is also slated to be released. Investors will also get some insight into inflationary pressure at the consumer level with Thursday's Consumer Price Index and the state of the housing market with December's housing starts.


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