BOND REPORT: Treasury Yields Hold Ground After Data, But Set To Mark Weekly Rise

By Mark DeCambre, MarketWatch , Sunny Oh Features Dow Jones Newswires

10-year Treasury yield around 2.20%

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Treasury yields mostly stabilized on Friday after a spree of weak economic data in the wake of Hurricane Harvey, showed the difficulties the Federal Reserve faces as it contemplates an additional rate rise before the end of 2017.

Early moves in New York follow inflation data on Thursday that came in hotter than expected (http://www.marketwatch.com/story/higher-rents-gas-boost-inflation-in-august-cpi-shows-2017-09-14), bolstering the view that the U.S. central bank may signal that its desire to normalize monetary policy remains intact during next week's policy meeting.

Yields and bond prices move in opposite directions.

Overall, Treasury yields are solidly higher for the week after the risks that drove the 10-year Treasury yield below 2.10% faded. Investors unwound bullish bond trades as geopolitical concerns from North Korea waned, the White House made efforts to enlist bipartisan support for its pro-growth agenda, and damages estimates from Hurricane Irma came down after it shifted off-course.

The yield on 2-year Treasury note was at 1.364%, compared with 1.367% late Thursday in New York, while the benchmark 10-year Treasury note yield was at 2.209%, compared with 2.199% in the previous session. The yield for the 30-year Treasury bond, known as the long bond, traded at 2.785%, versus 2.782% on Thursday.

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Retail sales fell more than expected in August, showing a decline of 0.2%, even as economists polled by MarketWatch had forecast no change. This marks the biggest drop in six months and follows two soft readings in July and June. Analysts said they had expected Hurricane Harvey to take a toll on this month's retail figures, but the extent of the drop caught some market participants by surprise.

"Though likely distorted by Hurricane Harvey, retail sales pulled back more than expected in August," wrote Sal Guatieri, senior economist at BMO Capital Markets.

See: U.S. retail sales slump near end of summer (http://www.marketwatch.com/story/us-retail-sales-slump-near-end-of-summer-2017-09-15)

Industrial production plunged in August (http://www.marketwatch.com/story/hurricane-harvey-slams-industrial-output-in-august-2017-09-15), with a 0.9% drop, the biggest decline since May 2009 when the economy was in recession. The Federal Reserve reported that the fall was driven by shrinking output in petroleum refining, mining and plastics, all areas that ostensibly play a big role in Texas' economy. While, consumer confidence (http://www.marketwatch.com/story/consumer-sentiment-falls-slightly-in-september-amid-hurricane-concerns-2017-09-15)fell to 95.3 in September from 96.8.

"The Fed will have a less muddy picture of the impact of the hurricanes on economic activity at the time of the December 13 policy announcement to discern whether the economy's underlying growth rate has shifted lower," said Guatieri.

Uncertainty over whether the Fed will stand pat this year was stoked after a strong inflation reading on Thursday. The consumer-price index rose 0.4% in August (http://www.marketwatch.com/story/higher-rents-gas-boost-inflation-in-august-cpi-shows-2017-09-14), compared with forecasts for a 0.3% rise. The data helped to push up the yearly inflation rate higher to 1.9%, close to the Fed's long-term 2% target.

Inflation has been a key focus for bond investors, because stubbornly low inflation has threatened to stay the Fed's hand at lifting rates. Rising inflation can chip away a bond's fixed value, which in turn can spur selling in government paper, pushing yields higher.

Of late, expectations for a rate increase have shifted to more probable than less. The market is currently pricing in a better than 50% chance of a rate hike before the end of 2017, compared with around 30% last week, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

Friday's yield moves come after North Korea fired a missile over Japan (http://www.marketwatch.com/story/un-security-council-to-hold-emergency-meeting-after-latest-north-korean-missile-test-2017-09-14)for the second time in less than a month, defying rising international efforts to force it to abandon course. But overnight trading following the launch was surprisingly subdued.

Read: Homemade bomb on London subway train injures at least 22, declared terrorist attack (http://www.marketwatch.com/story/terror-explosion-on-london-underground-train-injures-passengers-2017-09-15)

In Europe, bond yields were trending higher after the Bank of England on Thursday left interest rates unchanged but signaled that it intends on raising rates in coming months. U.K. 10-year bond yield , or gilts, surged to 1.319%, according to FactSet data. The British pound also bounced against the dollar, most recently at $1.358, marking its highest level since the U.K. voted to exit from the European Union in June 201 (http://www.marketwatch.com/story/ballistic-pound-shoots-up-to-highest-level-since-brexit-vote-2017-09-15)6.

Meanwhile, the yield on the German 10-year bond, known as the bund, was at 0.437%, versus 0.312% on Sept. 11.

In exchange-traded products, the iShares 20+ Year Treasury Bond ETF(TLT) was unchanged on Friday, keeping a weekly decline of 1.7% intact.

(END) Dow Jones Newswires

September 15, 2017 11:07 ET (15:07 GMT)