BOND REPORT: Bond Bulls Retreat As 2-year Treasury Yield Posts Largest Weekly Jump In 6 Months

Federal Reserve meets next week

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

Inflation data on Thursday came in hotter than expected (, bolstering the view that the U.S. central bank may signal at next week's policy meeting that its desire to normalize monetary policy remains intact.

Yields and bond prices move in opposite directions.

Overall, Treasury yields were solidly higher for the week as traders looked past the fears that previously drove the 10-year Treasury yield below 2.10%, including tensions surrounding North Korea and damage from Hurricane Irma.

The yield on 2-year Treasury note rose 1.6 basis points on Friday, extending the weeklong rise to 11.4 basis points, the biggest five-day yield gain since March 3. The 30-year bond yield was down 1 basis point, but nonetheless 9.4 basis points for the week, while the 10-year benchmark note yield was virtually unchanged for the day, keeping the overall weekly move of 14.5 basis points intact.

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," noted Sal Guatieri, senior economist at BMO Capital Markets.

See: U.S. retail sales slump near end of summer (

Industrial production plunged in August (, 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 ( 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 (, 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.

"Signs that the inflation data may be getting back on track with this week's CPI release for August should damp the impulse to downshift the policy path at this point," wrote Deutsche Bank strategists in a recent note.

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 increase before the end of 2017, compared with around 30% last week, according to CME Group data (

Friday's yield moves come after North Korea fired a missile over Japan ( 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 (

In Europe, bond yields rose 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 as high as 1.34% before settling at 1.306%, 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 (

Meanwhile, the yield on the German 10-year bond, known as the bund, was at 0.430%, versus 0.312% on Sept. 11.

In exchange-traded products, the iShares 20+ Year Treasury Bond ETF(TLT) was unchanged on Friday, but fell 1.7% over the week.

(END) Dow Jones Newswires

September 15, 2017 16:08 ET (20:08 GMT)