The yield curve steepened following the retail sales data, with the gap between 2-year and 10-year yields rising to 52.9 bps US2US10=TWEB, the widest spread since May. It was last at 51.5 bps, compared with 49.8 bps late Thursday.
The curve's shift is known as a bear steepener, where long-term yields rise faster than shorter-dated ones, suggesting a pickup in inflation expectations.
Ian Lyngen, managing director and head of U.S. rates strategy at BMO, said the bond market is likely facing a period of consolidation in the coming week now that major indicators have been reported.
Retail sales weakness and rate odds
Following the retail sales figures, Treasury yields, which move inversely to prices, fell across the curve, before rising again, suggesting investors remain more concerned about inflation stemming from the Middle East conflict than the recent run of weaker-than-expected economic figures.
"Looking at the 10-year, I guess it's basically done a round trip since retail sales," said Zachary Griffiths, head of macro and investment grade strategy at CreditSights. "I guess there's still a lot of uncertainty with respect to the Iran war and what that means for oil prices."
U.S. retail sales fell 0.6% last month after an unrevised 0.2% gain in June, the first decline in nine months as the boost from big tax refunds eased.
The unexpected decline in retail sales was also payback after Amazon pulled forward its Prime Day event to June from July, analysts said, as other retailers also offered competing promotions. Declining gasoline prices also weighed on receipts at service stations.
"Most of the weakness seems to be a timing issue, with Amazon's Summer Prime Day moving forward a few weeks into June this year," wrote Tom Simons, chief U.S. economist at Jefferies in New York, in a research note.
The Amazon factor caused nonstore retailer sales to drop 2.2%, he added. "Looking past this drag, the numbers aren't quite as bad as they seem."
Following the retail sales report, U.S. rate futures priced in just a 29% chance of a rate hike at next month's policy meeting, down from 34% late on Thursday, according to the CME's FedWatch.
Treasuries give back early gains after retail sales data fades
U.S. Treasuries fell on Friday after an initial rally driven by weaker-than-expected retail sales data faded, while persistent Middle East tensions kept investors on edge with crude prices turning higher.
In afternoon trading, U.S. 2-year yields, which are sensitive to the outlook for interest rate moves, rose 3.1 basis points (bps) to 4.171% US2YT=RR. On the week, however, they were down 3.1 bps, sliding for a third straight week.
Following the retail sales number earlier, the 2-year yield dropped to its lowest since late May.
The benchmark 10-year yield climbed 4.9 bps to 4.690% US10YT=RR, while U.S. 30-year yields advanced 4.7 bps to 5.258% US30YT=RR, the largest one-day rise since late July. U.S. 30-year yields have risen in three of the last four weeks.
Rising yields mean Treasury debt prices are down.
Consumer sentiment weakens as Strait of Hormuz concerns lift oil
U.S. consumer sentiment also soured in early August on worries about the rising cost of living.
The University of Michigan's Consumer Sentiment Index dropped to 51.0 this month from 55.2 in July, ending two straight months of improvement. Economists polled by Reuters had forecast the index would be at 54.5.
Investors remain worried about the Strait of Hormuz. Transit through the key waterway appeared to grind to a near standstill on Friday after two more ships were attacked and the United States said it could maintain a naval blockade of Iran indefinitely.
Benchmark Brent futures LCOc1 and U.S. West Texas Intermediate crude futures CLc1 were both up at about $88 and $82 a barrel respectively.
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