US Treasury yields broadly rose on Friday, despite unexpectedly weak retail sales data and relatively tame inflation figures, as comments from the US government about potentially maintaining an "indefinite" naval blockade of Iranian ports intensified concerns over geopolitical and inflation risks, prompting selling in longer-dated bonds.
The benchmark 10-year Treasury yield, a key gauge of US government borrowing costs, climbed more than 5 basis points to 4.696%. The 2-year yield, which is more sensitive to Federal Reserve short-term rate policy, rose about 3 basis points to 4.171%. The 30-year yield gained nearly 6 basis points to 5.267%. Bond prices move inversely to yields.
Consumer spending data released on Friday came in significantly weaker than expected. July retail sales fell 0.6% month-over-month, while economists surveyed by Dow Jones had forecast a 0.1% increase. The soft consumer data offered further evidence that US economic demand may be cooling, reducing expectations for the Fed to continue raising short-term rates in the near term.
However, geopolitical risks have re-emerged as a focal point for bond markets. US Treasury Secretary Bessent, in an interview, stated that the US might take new measures to further isolate Iran economically, describing the steps as reaching an "unprecedented" level. His comments briefly pushed Treasury yields higher. Earlier, US Defense Secretary Hegseth also indicated that the US military could maintain a naval blockade of Iranian ports "indefinitely." These statements suggest that the US-Iran conflict and related energy supply risks could persist for a longer period, prompting markets to reassess the potential impact of geopolitical tensions on oil prices, inflation, and long-term US interest rates.
Looking at this week's inflation data, US price pressures actually showed some moderation. The July Producer Price Index (PPI) was flat month-over-month, below the market expectation of a 0.2% increase. The Consumer Price Index (CPI), released earlier in the week, was also relatively tame and broadly in line with economist expectations. Strategists at ING noted that this week's US inflation data was generally under control, which is a positive signal for the Treasury market and did alleviate some pressure for further rate increases. However, the factors keeping yields elevated have not completely disappeared; real yields remain relatively high and are likely to stay at elevated levels.
The US bond market is currently being pulled in two directions. On one hand, weaker retail sales and easing inflation pressures reduce the necessity for the Fed to raise rates further. On the other hand, energy and inflation risks stemming from the ongoing US-Iran tensions, coupled with persistently high long-term real interest rates, continue to exert pressure on longer-dated Treasuries. The fact that the 30-year yield rose more than the 2-year yield on Friday suggests that market pressure is more concentrated on long-term bonds.
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