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

Long-dated Treasury yields rose Friday, but remained on track for 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,
    1.567%

    rose to 1.572%, up from 1.519% at 3 p.m. Eastern on Thursday, after ending last week above 1.6%.
  • The 2-year Treasury yield
    TMUBMUSD02Y,
    0.394%

    was at 0.394%, rising from 0.352% on Thursday. The short end of the yield curve has backed up this week, after the 2-year yield ended last Friday at 0.318%.
  • The 30-year Treasury bond yield
    TMUBMUSD30Y,
    2.050%

    rose to 2.057%, 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.

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.

The moves across the 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?

“Bonds yields are grinding slightly higher — Treasurys, investment-grade corporates, and high-yield too — as concerns that inflation is more than transitory has been stated by CEOs of most major banks reporting this week,” said Louis Navellier, chairman of Navellier & Associates, in a note.

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