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Bond Report: Treasury yields bounce as inflation expectations rise, retail sales jump

Long-dated Treasury yields rose Friday, trimming a weekly decline, as a closely watched market-based measure of inflation expectations hit a more-than-16-year high and September retail sales came in stronger than expected.

What are yields doing?
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    1.573%

    ended the week at 1.574%, up from 1.519% at 3 p.m. Eastern on Thursday. For the week, the benchmark yield fell 3 basis points, its first such fall in seven weeks.
  • The 2-year Treasury yield
    TMUBMUSD02Y,
    0.390%

    rose to 0.399%, compared with 0.352% on Thursday afternoon. The short end of the yield curve backed up this week, with the 2-year rate at its highest since March, according to Dow Jones Market Data.
  • The 30-year Treasury bond yield
    TMUBMUSD30Y,
    2.047%

    rose to 2.048%, compared with 2.025% Thursday afternoon, but down from 2.161% at the end of last week.
What’s driving the market?

Yields were bouncing after a market-based measure of inflation expectations, the break-even rate on five-year Treasury inflation-protected securities, or TIPS, traded above 2.75%, its highest since April 2005, according to Reuters.

U.S. retail sales climbed 0.7% in September, after a nearly 1% gain in August, underlining robust consumer demand that is seen amplifying supply-chain bottlenecks and reinforcing inflation pressures. Economists had expected a 0.2% fall in sales.

Meanwhile, the University of Michigan consumer sentiment index for October unexpectedly fell to 71.4. Expectations for inflation in the next year rose to 4.8%, while the 5-to-10-year outlook slipped to 2.8%.

Long-dated yields have declined this week, flattening the yield curve — a line plotting yields across Treasury maturities. The moves come after a slightly hotter-than-expected September consumer-price index reading on Wednesday and a somewhat smaller-than-expected rise in the September producer-price index on Thursday.

Also on Wednesday, minutes of the Federal Reserve’s September meeting affirmed expectations that policy makers will begin scaling back monthly asset purchases before year-end.

The moves across the yield curve, according to some analysts, reflect growing worries of a policy error by the Federal Reserve, in which the central bank tightens policy more aggressively than previously anticipated in an attempt to get a grip on inflationary pressures that may be less “transitory” than policy makers initially anticipated.

What are analysts saying?

Heading into the final months of the year, “likely outcomes would be for economic growth to slow from the well-above average pace seen in the first half of 2021, unemployment to continue to fall from its current level of 4.8% and the Fed to begin reducing (tapering in Fed-speak) bond-market purchases after its Nov. 3 meeting,” said John Gentry, senior portfolio manager at Federated Hermes, in emailed comments.

“Treasury yields remain well below long-term averages, but nothing demands policy makers must catch up overnight,” he wrote. “In fact, recall that the 2-year Treasury yield ranged from 0.20% to 0.60% for more than three years during the early part of the last decade. Given the obstacles the pandemic has produced, it is difficult to envision yields reaching even average levels in the near future.”

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