Treasuries Fall After July Retail Sales Gain Exceeds Forecast

Treasuries fell after U.S. retail sales rose for the first time in four months in July and exceeded forecasts, damping demand for the safety of U.S. government debt.

Benchmark 10-year note yields reached almost the highest level since May as the consumer-spending data reduced speculation the Federal Reserve will add to its monetary stimulus. U.S. debt fell earlier after the German economy expanded in the second quarter at a faster pace than analysts forecast and the French economy unexpectedly avoided a contraction.

“Tactically, it makes it tough to come in and buy bonds,” said Larry Dyer, a U.S. interest rate strategist with HSBC Holdings Plc in New York, one of 21 primary dealers that trade with the Fed. “It’s a very good number, but it’s just one month’s worth of data.”

The benchmark 10-year yield rose five basis points, or 0.05 percentage point, to 1.71 percent at 1:25 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 14/32, or $4.38 per $1,000 face amount, to 99 6/32. The yield reached 1.73 percent, close to the highest since May 29.

Treasury 10-year yields have risen from a record low 1.379 percent on July 25.

Yield Difference

The gap between yields on Treasuries maturing in two and 30 years reached 2.54 percentage points, the most since May 29, and is up from 2.24 percentage points on July 25, the lowest since January 2009.

Volatility dropped for a third session yesterday. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, slid to 67.2 from 2012’s high of 95.4 in June. The average over the past decade is 101.14.

The 0.8 percent retail sales advance followed a 0.7 percent decrease in June that was weaker than first reported, Commerce Department figures showed today in Washington. Economists projected a 0.3 percent rise, according to the median forecast in a Bloomberg survey. Sales excluding automobiles also climbed 0.8 percent.

The pickup in retail sales last month followed a quarter in which household spending grew at the slowest pace in a year. Consumer purchases, about 70 percent of the economy, expanded at a 1.5 percent annual rate from April to June, according to Commerce Department data.

Economic Data

“The retail sales number would suggest there was some rebound in July from somewhat depressed June levels,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh.

The Fed bought $4.6 billion in Treasuries with maturities of eight to 10 years today, according to the Fed Bank of New York website. The purchases are part of the central bank’s effort to support the economy by putting downward pressure on long-term interest rates.

The U.S. central bank has held its target for overnight bank lending in a range of zero to 0.25 percent since 2008 and plans to keep it there at least through late 2014 to stimulate the world’s biggest economy. The Fed also bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing.

Real Yields

The 10-year yield surpassed the level of U.S. consumer- price increases. U.S. consumer-price inflation slowed to 1.6 percent in July from a year earlier, versus June’s 1.7 percent reading, according to a Bloomberg survey of 40 economists before the Labor Department report tomorrow.

Expectations for inflation have risen, according to yields on Treasuries that protect investors from the impact of inflation. The difference between 10-year yields on Treasury Inflation-Protected Securities and conventional U.S. government securities widened to 2.28 percentage points, near the most since April and is up from 2.05 percent on July 12. The spread represents the expected rate of inflation for the life of the debt.

The producer price index rose 0.3 percent after an increase of 0.1 percent in June, the Labor Department reported today in Washington. The median estimate in a Bloomberg survey of 78 economists called for a 0.2 percent gain. Core inflation, which excludes volatile food and energy prices, climbed 0.4 percent, the most since January.

“I don’t think one number is a trend,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., a primary dealer. “The market’s been focused on Europe as well as a weakening U.S. economy.” German bunds “seem to be in a bit of a retreat today, and our market is going down in sympathy.”

German 10-year yields rose seven basis points to 1.47 percent while Spain’s bonds rose on speculation the nation is edging closer to asking European policy makers to buy its debt after Prime Minister Mariano Rajoy reiterated he will act in best interests of his country.

The yield on 10-year Spanish bonds dropped 12 basis points to 6.72 percent. Italian 10-year bond yields declined five basis points to 5.85 percent, after rising to 5.95 percent.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net