Yields for U.S. government debt were headed slightly higher Friday but were set for a weekly drop after Federal Reserve Chairman Jerome this week reiterated the central bank’s view that rising inflation is likely to be transitory and that tapering of asset-purchases, including government debt, isn’t imminent.
How Treasurys are performing
The 10-year Treasury note
yields 1.325%, compared with 1.297% at 3 p.m. ET on Thursday.
The 30-year Treasury bond
was yielding 1.947%, versus 1.920% a day ago.
The 2-year Treasury note rate
was at 0.242%, compared with 0.223% Thursday.
For the week, the 10-year Treasury note is down 2.9 basis points, the 30-year Treasury was off 3.2 basis points for the week, while the 2-year was looking at a weekly climb of 2.7 basis points.
Powell completed two days of testimony and his comments had the effect of driving bond yields lower for the week.
Buying of government debt is being underpinned by weakening assumptions about the path for U.S. 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 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
fell to a three-month low ahead of next week’s European Central Bank gathering.
In other data, the University of Michigan releases a preliminary report on consumer sentiment and inflation expectations for July at 10 a.m.
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.