Weak data depresses Treasury yields

Treasury yields fell on Wednesday, with the two-year yield hitting its lowest in 15 months after the United States reported that retail sales and industrial output declined in April, raising expectations the Federal Reserve will cut interest rates this year.
The two-year yield, which is a proxy for market predictions of Fed policy, fell as low as 2.139%, breaking through late-March levels to its lowest since February 2018. It was last down 3.3 basis points at 2.170%. US retail sales unexpectedly fell in April as households cut back on purchases of motor vehicles and a range of other goods, pointing to a slowdown in economic growth after a temporary boost from exports and inventories in the first quarter, the Commerce Department said.
In a separate report, the Fed said industrial production fell 0.5% in April after rising 0.2% in March. The third drop in production this year was led by manufacturing. Following the weak reports, the Atlanta Federal Reserve cut its second-quarter gross domestic product growth estimate to a 1.1% annualized rate from a 1.6% pace. The economy grew at a 3.2% rate in the January-March period.
The data added to ongoing "growth concerns, and market participants are continuing to price in the Fed cutting rates whether it's late this year or early next year," said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald.
"Obviously, the Fed is not there yet," he said. "But the market is definitely, between data and trade concerns and global growth, pricing in a Fed rate cut."
Expectations that interest rates will be at current levels in December 2019 were at 24.9%, down from 30% yesterday, according to CME Group's FedWatch tool. About 41% of traders are pricing in one rate cut by the end of the year, with 25.5% expecting rates to be 50 basis points lower than where they currently stand by then. By January 2020, expectations that rates will be unchanged from today are just 19.9%.
The Fed put its rate-hiking policy on pause earlier this year after volatility roiled financial markets in December. Since then, US economic data has been mixed, with Wednesday's reports another indication of slowing growth. The benchmark 10-year yield was last down 4 basis points at 2.379%, with the biggest gains in the three-, five- , and seven-year note yields all up around 4 basis points.