Bond Report: Treasury yields rise Friday but 10 and 30-year debt mark third straight weekly slide

How Treasurys are performing

• The 10-year Treasury note TMUBMUSD10Y, 1.293% yields 1.300%, compared with 1.297% at 3 p.m. ET on Thursday.
• The 30-year Treasury bond TMUBMUSD30Y, 1.922% was yielding 1.931%, versus 1.920% a day ago.
• The 2-year Treasury note rate TMUBMUSD02Y, 0.237% was at 0.226%, compared with 0.223% Thursday.

The weekly stats

For the week, the 10-year Treasury note fell 5.4 basis points, the 30-year Treasury was off 5 basis points, representing a third consecutive yield slide for the durations. The 2-year, however, posted a weekly climb of 1.1 basis points, marking its largest weekly gain since the period ended June 25, according to data compiled by Dow Jones Market Data.

Fixed-income drivers

Powell completed two days of testimony and his comments had the effect of driving bond yields lower for the week.

Buying of government debt has been underpinned by weakening assumptions about the path for U.S. economic growth as Americans attempt to claw back from the worst pandemic in generations, analysts said.

However on Friday data showed June retail sales increased 0.6% last month in a much better showing than Wall Street had expected. Economists polled by The Wall Street Journal had forecast a 0.4% decline. Excluding autos, retail sales advanced 1.3%—almost three times as much as Wall Street expected.

The Fed chairman emphasized that the outlook for the economy remains uncertain but that the central bank is betting that high inflation will be a passing phase, some analysts noted.

A number of market participants have voiced views at odds with the Fed’s assumptions about the transitory nature of inflation and believe that asset purchases of $ 120 billion a month, including Treasurys and mortgage-backed securities, must end soon to stave off out-of-control pricing pressures.

Powell has said that the Fed is in no rush to taper those purchases, known as quantitative easing, or QE, and that has supported some of the recent yield moves lower.

“We’ve said that we would begin to reduce our asset purchases when we feel that the economy has achieved substantial further progress measured from last December,” Powell told Senate lawmakers on Thursday. “We’re in active consideration of that now.”

U.S. Treasury Secretary Janet Yellen told CNBC during an interview on Thursday that she expects the U.S. economy will see “several more months of rapid inflation.”

Meanwhile, the Germany’s 10-year yield TMBMKDE-10Y, -0.350% fell to a three-month low ahead of next week’s European Central Bank gathering.

In other data, consumer sentiment in the U.S. declined in early July as Americans’ prospects for the national economy deteriorated amid concerns over high inflation. The preliminary estimate of the index of consumer sentiment released Friday by the University of Michigan came in at 80.8 in July, down from 85.5 in June.

What strategists and traders say

“Retail sales increased 0.6% in June from -1.7% in May. Combined with downward revisions to the prior month, this was above published street expectations, but our read on the report is more negative,” wrote Stevem Ricchiuto, chief U.S. economist at Mizuho, in a note.

“On a real—that is inflation-adjusted—basis, retail sales are contracting for the third consecutive month by -1.3% from -3.3% in the prior month. The implication for real GDP is a sharp deceleration in real goods consumption from 26.5% annualized in Q1 to approximately 11.0% annualized, which is entirely due to quarterly base effects,” Ricchiuto said.

“These dynamics highlight a problem GDP forecasts more broadly: More spending is being captured by price increases instead of volume increases. This stark deceleration in real terms casts serious doubt on the most bullish Q2 GDP forecasts in the 9+% area, and reinforces our call for Q2 real GDP growth closer to 7.5%,” according to the Mizuho economist.