Bonds Rally on New Data

Bonds jumped on Thursday after reports on retail sales and initial jobless claims showed modest improvement, but did little to alter impressions of a weak economy.

The two-year note rose 3/32 to 100 10/32, dropping its yield to 1.09%, while the 10-year gained 15/32 to 103 31/32, pushing its yield lower to 3.16%. The long bond gained 27/32, lowering its yield to 4.21%.

Retail sales edged up 0.1% in May, following a revised 0.3% decline in April, the government reported. Excluding autos, sales rose 0.6% in May after a 0.4% drop in the previous month.

Initial jobless claims fell to 17,000 to 430,000. But the four-week average of claims rose to 433,750 from the previous week's revised average of 431,500. A reading above 400,000 claims is consistent with a weak labor market. Moreover, continuing claims rose to 3.8 million, their highest level since 1983.

Separately, the import price index fell 0.3% in May, with core ex-petroleum prices falling 0.2%.

"Today's data -- sales, claims and the news that ex-oil import prices fell 0.2% in May -- have enhanced the chances of a Fed ease at the June 24-25 FOMC meeting," said David Rosenberg, an economist at Merrill Lynch, who called the data "bond friendly," in a research note. "The odds still favor 50 [basis points] over 25, in our view, but this is a closer call than whether they go at all.

Fed fund futures were lately pricing in a 100% chance of a 25-basis-point cut at the end of the month and 50% odds of a 50-basis-point cut. Interest rates are at their lowest level in more than four decades.