May 15, 2018 / 7:41 PM / 8 months ago

TREASURIES-Retail sales gain add fuel to U.S. bond selloff

    * U.S. 10-year yield seen next testing 3.21-3.23 percent 
    * Fed's Williams, Kaplan see gradual U.S. rate hikes on
    * Futures imply traders up bets on three more rate hikes in
    * Two-year yield highest since August 2008

 (Updates market action, adds quote)
    By Kate Duguid and Richard Leong
    NEW YORK, May 15 (Reuters) - A solid rise in U.S. retail
sales in April rocked a teetering U.S. Treasuries market on
Tuesday as a wave of selling propelled the benchmark 10-year
note's yield through a key technical support, sending it to a
near seven-year high.
    The 10-year yield had hovered around 3 percent since
reaching late last month on concerns about rising inflation and
a ballooning federal budget gap. On the other hand, trade
tension between the United States and other nations and signs of
faltering growth in Europe had kept a lid on U.S. yields.
    "(Today's) move was pretty violent, but the trading volume
was not massive," said Guy LeBas, chief fixed income strategist
at Janney Montgomery Scott. "It looks like a decisive break."
    If 10-year yield rises further following the technical
breach above 3.05 percent, it would next test the 3.21-3.23
percent area, which it last visited in July 2017, LeBas and
other analysts said.    
    The 10-year Treasury yield on Tuesday reached
3.095 percent, its highest level since July 2011. It was last at
3.076 percent, up 8 basis points, its biggest one-day yield rise
since March 2017, Reuters data showed.
    Traders unloaded their bond holdings after the U.S. Commerce
Department said retail sales rose 0.3 percent last month,
matching analyst forecasts. The latest data supported the notion
that consumer spending appeared on track to accelerate after
slowing sharply in the first quarter.
    The two-year yield, which is most sensitive to
traders' view on Federal Reserve policy, was up over 3 basis
points at 2.581 percent after touching 2.589 percent, the
highest since August 2008.    
    A quicker pace of economic growth in the second quarter will
likely allow the Fed to increase key overnight borrowing costs
in the coming months, analysts and traders said.
    "It's a better start to the second quarter," said Thomas
Roth, head of U.S. Treasury trading at MUFG Securities America
in New York. "The Fed will likely go again in June."
    This view on the next Fed rate increase was reinforced by
comments from San Francisco Fed President John Williams and
Dallas Fed chief Robert Kaplan at separate public appearances.
    However, Williams and Kaplan downplayed the likelihood the
central bank is considering a faster pace of rate hikes as
productivity remains sluggish and inflation, while firming
toward  the Fed's 2 percent goal, is not overheating.

    Interest rates futures implied traders now saw more than a
50 percent chance the Fed would raise rates three more times by
May 15 Tuesday 3:27PM EDT/ 1927 GMT
 US T BONDS JUN8               141-6/32     -1-18/32   
 10YR TNotes JUN8              118-168/256  -0-152/25  
                               Price        Current    Net
                                            Yield %    Change
 Three-month bills             1.88         1.9153     0.016
 Six-month bills               2.035        2.0847     0.000
 Two-year note                 99-156/256   2.5807     0.034
 Three-year note               99-162/256   2.7535     0.053
 Five-year note                99-52/256    2.9237     0.072
 Seven-year note               98-244/256   3.043      0.083
 10-year note                  98-72/256    3.076      0.081
 30-year bond                  98-128/256   3.2032     0.075
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
 U.S. 2-year dollar swap        21.50         0.75     
 U.S. 3-year dollar swap        15.50         0.25     
 U.S. 5-year dollar swap         8.00         0.00     
 U.S. 10-year dollar swap        3.00         0.50     
 U.S. 30-year dollar swap       -8.25         1.00     

 (Reporting by Kate Duguid and Richard Leong;
Editing by Dan Grebler and Bernadette Baum)
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