Upbeat retail sales data flatten US yield curve

NEW YORK: The gap between US shorter-dated and longer-dated Treasury yields shrank on Thursday as surprisingly strong data on retail sales in November supported the view the Federal Reserve would raise interest rates further to keep the economy from overheating.

In the current low inflation climate, traders have bet longer-dated bond yields would stay low and short-term rates would rise as the Fed and other major central banks have begun or are considering to reduce monetary stimuli as their economies have picked up momentum.

These curve flattening trades have been profitable in 2017 and are expected to remain so next year, analysts said.

"The yield curve will flatten in the long term," said Matt Freund, head of fixed income strategiest at Calamos Investments in Chicago. "The long end of the curve will be well-behaved with the Fed being deliberate in raising short-term rates."

Interest rates futures suggested traders priced in about a 54 percent chance of a rate hike next March to 1.50-1.75 percent after the Fed's third rate increase in 2017 on Wednesday, CME Group's FedWatch tool showed.

Wall Street's top banks expected the US central bank would raise key borrowing costs three times in 2018, matching the number of increases this year and what was projected among policy-makers, a Reuters poll conducted on Wednesday showed.

The yield spread between five-year and 30-year Treasuries touched 57.4 basis points, a tad short of 57.3 basis points set in early December which a level not seen since October 2007. It was 62 basis points on Wednesday, Reuters and Tradeweb data showed.

Earlier Thursday, the Commerce Department said retail sales grew 0.8 percent last month, beating a median forecast of 0.3 percent among analysts polled by Reuters.

These upbeat figures led some analysts to raise their growth estimates on gross domestic product for the fourth quarter to as high as 3.0 percent.

Thursday's yield rise was capped by the European Central Bank's pledge to maintain its easy monetary policy stance even as it upgraded growth and inflation forecasts for the euro zone.

The benchmark 10-year Treasury yield was 2.346 percent, little changed from late Wednesday.

The two-year yield rose nearly 3 basis points to 1.811 percent but still below the nine-plus year peak at 1.852 percent set on Wednesday. The five-year yield increased almost 2 basis points to 2.128 percent, which was short of the 6-1/2 year high of 2.199 percent seen on Wednesday.