10-, 30-year Treasury yields hit five-week highs after December retail sales data

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  rose 12.6 basis points to 4.352%, from 4.226% on Tuesday. That was its largest one-day advance since Dec. 8, according to 3 p.m. Eastern time figures from Dow Jones Market Data.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  jumped 3.9 basis points to 4.103%, from 4.064% on Tuesday.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  rose less than 1 basis point to 4.311%, from 4.303% on Tuesday.

• Wednesday’s levels were the highest for the 10- and 30-year yields since Dec. 11-12.

What drove markets

In U.S. economic data on Wednesday, retail sales climbed 0.6% in December, beating the 0.4% gain expected in the Wall Street Journal forecast.

The data lent further credence to the idea that the economy remains too strong for the Federal Reserve to begin cutting rates as soon as March. On Tuesday, Fed governor Christopher Waller said that the central bank will likely lower borrowing costs this year, but that the shift in monetary policy doesn’t have to be “rushed.”

While markets priced in a 97.4% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Jan. 31, the chance of a 25-basis-point cut in the fed-funds rate by March was seen at 57.6%, down slightly from 63.1% on Tuesday, according to the CME FedWatch Tool. Meanwhile, the likelihood of no action in March was 40.9%.

Read: Two reasons why the 10-year Treasury yield is back above 4%

In other data releases, U.S. industrial output rose 0.1% in December while homebuilders’ confidence jumped this month. The Fed’s Beige Book report found signs of labor-market cooling in almost all parts of the country, based on data collected before Jan. 8. And Treasury’s $13 billion auction of 20-year bonds came in “soft” with dealers taking 17.3%, which is higher than average, according to strategist Vail Hartman of BMO Capital Markets.

Outside the U.S., inflation in the U.K. unexpectedly accelerated to 4% in December, adding to concerns that central banks may need to keep borrowing costs higher for longer.

In addition, European Central Bank President Christine Lagarde said on Wednesday that although it’s likely eurozone interest rates will be cut later this year, it is not helpful that markets are pricing in the timing and pace of monetary easing so aggressively.

What strategists are saying

“Retail sales in December surprised on the upside,” said Ian Lyngen, a rates strategist at BMO Capital Markets.

“This report will support Q4 growth expectations and function as a further pushback against March Fed cut expectations,” Lyngen wrote in a note. Treasurys were “weaker in the wake of the data, with the 2-year sector as the decided underperformer.”