Yields fall as weak US retail sales spur economy concerns

NEW YORK: Treasury yields fell on Thursday after data showed that US retail sales recorded their biggest drop in more than nine years in December, suggesting a slowdown in economic activity at the end of 2018.

The Commerce Department said retail sales tumbled 1.2 percent, the largest decline since September 2009, when the economy was emerging from recession.

"It calls into question the underlying strength of the domestic consumer and in particular this kind of lays the groundwork to confirm the Fed's bias in pausing the tightening cycle," said Jon Hill, an interest rate strategist at BMO Capital Markets in New York.

Benchmark 10-year yields have fallen from seven-year highs reached in October on concern about weak international growth and the possibility of a slowing US economy. Those fears have also led the Federal Reserve to adopt a far more dovish posture on further interest rate increases.

Hill added that the Fed funds market is now pricing for the possibility of a rate cut in late 2019 or early 2020.

Fed Governor Lael Brainard also said on Thursday that the US central bank should stop paring its balance sheet by the end of this year, suggesting that it could wind up with a permanently bigger balance sheet than had been expected even a few months ago.

The US data comes after Germany's gross domestic product came in even lower than economists' expectations in the fourth quarter of last year, with the country narrowly avoiding recession.

US 10-year notes gained 13/32 in price to yield 2.661 percent, down from 2.706 percent on Wednesday. They are down from 3.261 percent in October.

The yields rose to one-week highs on Wednesday after data showed that core consumer price inflation, which excludes the volatile food and energy components, gained 0.2 percent in January, easing some concerns about a drop in inflation.

Consumer sentiment data on Friday will be the next focus for further signals about the US economy's strength.

Investors are also focused on trade talks between the United States and China.

The Trump administration's top two negotiators in trade talks with China will meet on Friday with Chinese President Xi Jinping, but there has been no decision to extend a March 1 US deadline for a deal, White House economic adviser Larry Kudlow said on Thursday.