Bond Prices Mixed, Mostly Lower

U.S. Treasury prices fell further Friday with the shorter end hit hardest. The 10-year is holding near the technically significant 2.20% point, with a close through that level seen as prompting more selling. The five-year note was flirting with Thursday’s lows which marked levels last seen in mid July. A more hawkish Bank of England tone weighed on prices. Hurricane-affected data were mixed, with soft retail sales and consumer confidence but a stronger New York manufacturing preliminary report. Increasing inflation and growth expectations added to the odds of another Federal Reserve rate hike by year-end.

The 30-year yield fluctuated near 2.77% against a 2.7876% high and a 2.78% close Thursday. The 10-year yield was little-changed near the key 2.20% point versus a 2.2113% high, an early 2.185% low and 2.197% close. The five-year yield was near 1.807% from a 1.8122% high, 1.78% low and 1.785% close. The two-year yield was working either side of 1.39% from a 1.3966% high, 1.365% low and 1.3675% close.

The curve flattened, with the two- and 10-year differential tightening to 81.9 from 82.9, while the five- and 30-year yield spread narrowed 97 from 99.5 Thursday.

The CME Group fed fund futures showed the chances of a minimum 25-basis-point rate hike by the Dec. 12 -13 Federal Open Market Committee (FOMC) meeting rose to 58.3% versus 53% Thursday and near 31% a week back. The chance of an at least 25 bp bump by the March 21 meeting jumped to above 68% from 61.6% and 40.1% a week ago.

Friday’s economic reports showed weak retail sales data over the three months ending in August. Weakness was partly attributed to Hurricane Harvey, but also an expected hurricane hit to August industrial production, solid September Empire State data, an expected small July business inventory gain, and a slightly weaker-than-expected September University of Michigan consumer sentiment reading, A likely hurricane-led expectations drop is seen more than offsetting a current conditions bounce to a new cycle high.

Analysts with Action Economics trimmed their expected boost in Q2 gross domestic product (GDP) growth to 3.1% from 3.2%, versus a last reported rise of 3.0%, after the weak sales data. AE lowered its Q3 GDP estimate to 2.6% from 3.0% but raised its Q4 GDP forecast to 3.0% from 2.8%, due to the weaker consumption outlook and big hurricane disruption effects in the data that will push output growth into Q4 from Q3.

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