Treasury yields end at more than 16-year highs after strong U.S. retail-sales data

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  jumped 11.6 basis points to 5.212% from 5.096% on Monday. Tuesday’s level was the highest since July 6, 2006, based on 3 p.m. Eastern time figures from Dow Jones Market Data.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  soared by 13.7 basis points to 4.846% from 4.709% Monday afternoon. Tuesday’s level was the highest close since July 25, 2007.

• It was the biggest one-day jumps for the 2- and 10-year rates since July.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  climbed 8.6 basis points to 4.951% from 4.865% late Monday. Tuesday’s level was the highest close since Aug. 22, 2007. The 30-year yield has risen 17.4 basis points in the past two trading days.

• See also: ‘Bears are back in town,’ pushing 10-year Treasury yield closer to 5% after U.S. data

What drove markets

Data released on Tuesday showed that U.S. retail sales jumped a bigger-than-expected 0.7% in September, signaling that household buying power is strong enough to keep the economy expanding. Economists polled by The Wall Street Journal had forecast a 0.2% increase in sales.

Meanwhile, hopes that Wednesday’s trip by U.S. President Joe Biden to the Middle East may help prevent the Israel/Hamas war from causing a wider regional conflict helped reduce demand for perceived safety plays, such as U.S. Treasurys.

Markets priced in an 88% probability that the Fed will leave its policy interest rates unchanged at a range of 5.25%-5.50% on Nov. 1, according to the CME FedWatch Tool. The chance of a 25-basis-point increase to a range of 5.5%-5.75% by the subsequent meeting in December was seen at 38.7%.

In remarks made on Tuesday, Richmond Fed President Tom Barkin said he sees a “plausible story” in the idea that weakening demand in the economy is already working to bring inflation back to 2%.

Other U.S. economic updates released on Tuesday showed that U.S. industrial output rose 0.3% in September, with strikes by autoworkers having limited impact.

What analysts are saying

“In short, September retail sales came in much stronger than expected and the prior two months gains were revised up,” said Rubeela Farooqi, chief U.S. economist of High Frequency Economics.

“While consumers continue to face hurdles from higher borrowing costs, tighter credit conditions and elevated prices, a still-strong labor market, positive real disposable incomes and a gradual easing in price pressures are keeping spending and growth positive for now,” Farooqi wrote in an email. “For the Fed, an acceleration in household spending that supports growth and may be an upside risk to inflation will raise the odds of another rate hike by the Fed this year.”