BOND REPORT: Treasury Yields Suffer Largest Weekly Drop In A Month

Bond yields decline after core consumer-price index shows a small rise of 0.1%

Treasury yields moved firmly lower on Friday for the biggest weekly decline in a month, after weak inflation data and lukewarm consumer spending lowered expectations for two more Fed rate increases this year.

The 10-year Treasury note lost 6.9 basis points to 2.331%, backpedaling from its six-week high of 2.141% hit on May 10. The benchmark bond saw its largest weekly yield decline since the period ended April 13. Bond prices move in the opposite direction of yields.

The yield for the policy-sensitive 2-year Treasury lost 5.4 basis points to 1.292%, while the yield for the 30-year bond, or the long bond, gave up 4.7 basis points to 2.991%%.

More broadly, bond yields have been stuck in a relatively tight trading range between 2.3% and 2.6% for months, being pulled and pushed by a combination of swiftly changing expectations around fiscal stimulus, the Federal Reserve's efforts to normalize interest-rate policy and geopolitical risks.

On Friday, despite a spate of economic data showing a steady economic outlook, yields for U.S. government paper retreated. Investors were concerned over April's weak inflation reading, lowering expectations of higher rates. The consumer-price index, or CPI, notched 2.2% growth year on year, up 0.2% for April, higher than the Federal Reserve's 2% inflation target.

But strategists pointed out last month's increase was driven by higher energy prices , something which the Federal Reserve tends to discount when gauging if inflation is set to exceed its 2% target, warranting further monetary tightening. Core CPI, which excludes food and energy prices, grew 0.1% for April, missing the 0.2% target forecast by a survey of economists polled by MarketWatch. But it was up 1.9% on a year on year basis.

"The CPI number was pretty bad today. If you look through the details, the core CPI was much less than expected. The weakness was there, it was fairly prevalent in everything from cars to medical care," said Aaron Kohli, an interest rate strategist for BMO Capital Markets.

The Chicago Mercantile Exchange's FedWatch tool ( showed traders had priced in lower expectations of a June rate hike to 73.8% from 83.1% the day before.

Meanwhile, a report on retail sales showed a gain of 0.4%, but were below economists' expectation of 0.5%. The tepid growth added evidence of the retail sector's ailing health amid bankruptcies and a clutch of woeful earnings in the sector over the past few days. Anemic spending and weak economic growth could dampen inflation expectations, which can be bullish for bond prices, nudging yields lower.

See: Retail sales strengthen in April, brightening economic outlook (

( ( paid close attention to Fed speakers on Friday as they searched for clarity on the central bank's schedule for reducing its $4.5 trillion balance sheet. If the Fed, a large buyer of Treasurys, leaves the market, yields are likely to head higher.

Among Fed speakers, Philadelphia Fed President Patrick Harker, a voting member of the policy-setting Federal Open Market Committee, said he supported two more rate increases ( an improving economic outlook in a speech to the Urban Economic Policy Conference at Drexel University. On the other hand, Chicago Fed President Charles Evans, also a voting member, said downside risks to inflation could change the Fed's plans to tighten monetary conditions this year.

(END) Dow Jones Newswires

May 12, 2017 16:11 ET (20:11 GMT)