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Tuesday’s delayed retail-sales data for December undermined expectations for economic growth, leading to an extended rally in U.S. government debt.
The flat reading on retail sales, which showed that American consumer spending fizzled out at the end of last year, translated into concerns that U.S. growth may not be as strong as previously presumed — resulting in what may be a lower path for both interest rates and inflation this year. Because the U.S. tends to lead the rest of the world, traders in Europe may be considering what this weakness could mean for the global economy.
“Fears that the economy was overheating were totally misplaced,” said Jay Hatfield, chief executive of Infrastructure Capital Advisors in New York. These fears were in place as recently as January, when the annual pace of third-quarter U.S. gross domestic product was revised up to 4.4% from 4.3%. The thinking then was that stronger growth would likely produce more inflationary pressures and fewer Fed rate cuts — leading to higher bond yields.
Read: U.S. economy grew 4.4% in the third quarter, GDP shows. It showed little sign of slowing.
Tuesday’s rally sent the benchmark 10-year yield BX:TMUBMUSD10Y back to where it was just before expectations for stronger U.S. growth took hold in January. It fell 5.3 basis points to 4.14%, the lowest level in almost four weeks, after having jumped to as high as 4.3% last month. The rate on the 30-year bond BX:TMUBMUSD30Y dropped by 6.1 basis points on Tuesday to almost 4.79%, the lowest level since Jan. 15. In bonds, yields move in the opposite direction to prices, meaning that market-based rates decline during rallies in the underlying maturities.
