May 15, 2018 / 2:56 PM / a year ago

TREASURIES-Benchmark yield hits 7-year high after bump in April retail sales

 (Updates yields, table; adds analyst comment)
    By Kate Duguid
    NEW YORK, May 15 (Reuters) - The yield on the U.S. 10-year
Treasury note surged on Tuesday to its highest level since July
2011 after data showed retail sales increased modestly in April.
    The benchmark government yield reached a high of
3.069 percent in early trade, blowing through the key
psychological level of 3 percent it hit in late April for the
first time in four years. The rise in April sales, as well as a
revision higher of March data, pushed yields up enough to drive
through the next significant support level of 3.051 percent. 
    "The break of these levels is pretty key given that you’ve
taken out the last two cycle highs," said Aaron Kohli, interest
rates strategist at BMO Capital Markets in New York. Key support
levels are prices at which a downward trend can pause, given an
uptick in demand. As prices drop, demand increases, which in
turn slows or halts the fall in prices.
    The next key support level above 3.051 percent, according to
Kohli, is 3.212 percent, last passed on July 1, 2017.
    Technical drivers - rather than economic fundamentals -
offer a plausible explanation for Tuesday morning's move. The
modest increase in retail sales data was offset by a
softer-than-expected Consumer Price Index report for April,
which last week lowered expectations that inflation was on the
    Inflation drives up Treasury yields because the Federal
Reserve becomes more likely to intervene and hike interest
    "I don't think that marginal pip after the big miss from CPI
and a bunch of the other details from the last few weeks
suggests this is purely driven by the health of the economy,"
said Kohli. 
    Nevertheless, he said "there is some information there. It
may not be consistent with the themes of still-anemic growth,
and not terribly wide spreads, spending appetite from consumers,
but it does show some kind of strength. And so far, that's been
enough to get investors to sell, or at least not buy as many
10-years as they did in the past."   
    The Commerce Department said on Tuesday that retail sales
rose 0.3 percent last month, as rising gasoline prices weighed
on discretionary spending. But consumer spending appeared on
track to accelerate after slowing sharply in the first quarter.

    The two-year Treasury yield was last at 2.564
percent, up 1.7 basis points from late Monday. The 30-year bond
yield was last at 3.180, up 5.2 basis points from
late Monday. 
    May 15 Tuesday 10:42AM New York / 1442 GMT
 US T BONDS JUN8               141-17/32    -1-7/32   
 10YR TNotes JUN8              118-208/256  -0-112/2  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.88         1.9153    0.016
 Six-month bills               2.04         2.0899    0.005
 Two-year note                 99-162/256   2.5683    0.021
 Three-year note               99-176/256   2.7343    0.033
 Five-year note                99-82/256    2.898     0.046
 Seven-year note               99-28/256    3.0178    0.058
 10-year note                  98-120/256   3.0539    0.059
 30-year bond                  98-220/256   3.1843    0.056
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        21.25         0.50    
 U.S. 3-year dollar swap        15.25         0.00    
 U.S. 5-year dollar swap         8.00         0.00    
 U.S. 10-year dollar swap        2.50         0.00    
 U.S. 30-year dollar swap       -8.50         0.75    

 (Reporting by Kate Duguid;
Editing by Chizu Nomiyama and Dan Grebler)
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