(Updated from 2:21 p.m. ET)
U.S. Treasuries were weaker for the second consecutive day as more strong economic data led investors to start questioning how much further the
Federal Reserve will ease interest rates in order to boost the economy.
Lately, the 10-year benchmark Treasury note dropped 1 13/32 to 96 12/32, raising the yield, which moves inversely to price, to 5.484%. The 30-year Treasury bond, also known as the long bond, traded off 1 19/32 to 92 30/32, yielding 5.879%. On the short end of the market, the two-year note lost 8/32 to 99 13/32, yielding 4.318%. The shorter-term maturities react most dramatically to expectations of Fed easing, while longer-dated securities are usually a good proxy of inflation and the direction that the economy will take.
fed funds futures contract for May is currently pricing in about an 85% chance
Alan Greenspan and friends will slash interest rates by another 50 basis points, down from a 93% chance yesterday.
"Twenty-five basis points is probably more logical at this point, and that's what got the market spooked," said Bill Kirby, co-head of government trading at
The Fed has already cut rates four times since January, from 6.5% to the current 4.5% level. If the Fed is convinced the economy is getting back on track, it may have less reason to cut rates by 50 basis points at next week's meeting. This morning's consumer confidence figures, which mostly have been on a steady decline since September, rose to 92.6 from 88.4 in April. Consumers are certainly opening their wallets.
Retail sales for April, which were also out this morning, came in better than economists expected, gaining 0.8% for the month. Excluding automobiles, retail sales rose 0.7%, also ahead of economists' projections.
producer prices, which show growth in prices paid by manufacturers and helps gauge inflation, rose a bit more slowly than expected in April. The producer price index gained 0.3% in April, while economists expected an increase of 0.4%. Producer prices fell 0.1% in March. Excluding the volatile food and energy components, producer prices rose 0.2% in April, while only a 0.1% increase was expected.
Maryann Hurley, vice president of Treasuries at
, said the consumer confidence figures were "very surprising," given the decline in the labor market. "Maybe the consumer has bottomed out in here, and could be on a rebound."
What this means is that inflation could creep into the picture, Hurley said, pointing to the weakness of the longer-dated maturities. Investors have less incentive to hold long bonds as prices move higher. "If the consumer is really rebounding there could be inflation going forward," Hurley said.
"I think the Fed is still more concerned about growth," Kirby said. "One number doesn't make or break, even though we're actually worse off than I thought. You'll see unemployment claims going back and forth. The Fed's easing will take time to work its way through and more needs to be done."