Yields Spike in Fit of Pique Over Retail Sales

But low volume and technically inspired selling magnified the losses, participants said.
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Sheesh!

The bond market pitched a fit today, giving back nearly all of the gains it had piled up over the previous week and a half, in response to a strong -- but not

that

strong -- November

retail sales report.

Market participants said the downdraft was accelerated by some technically driven selling and by the low-volume, illiquid conditions endemic to the last weeks of the year.

"The fundamental guys were left scratching their heads after the number," said Mike Ryan, senior fixed-income strategist at

PaineWebber

.

Indeed. The benchmark 30-year Treasury bond lost 1 8/32 to 97 22/32, lifting its yield 10 basis points to 6.30%, the highest since Dec. 2. Shorter-maturity note yields added 9 to 11 basis points.

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Today's selloff was triggered by the news that retail sales rose 0.9% in November, vs. an average forecast of 0.5% among economists surveyed by

Reuters

. Bond investors fear that surging consumer demand will give rise to higher inflation.

That's a wide miss, but retail sales is a notoriously volatile report. It's less volatile at its core, which excludes auto sales, but that result was in line with expectations: up 0.4%.

"This was a pretty big move on what we'd consider to be only moderately stronger-than-expected retail sales numbers," Ryan said.

Meanwhile, the other major economic report released today -- the

Consumer Price Index for November -- was better than forecast, and it was expected to be the more influential report today.

The CPI rose 0.1% in November, 0.1% less than expected, while the core CPI, which excludes volatile food and energy prices, rose 0.2%, in line with the average forecast.

Dave Connors, a government bond trader at

Credit Suisse First Boston

, pointed out that today's move merely returned the market to the upper end -- in yield terms -- of its recent range. But he said fear that the

Fed will hike the

fed funds rate at least once more next year was driving bond prices lower.

"What the market's dealing with now is that the Fed's biased to tighten more," he said. "As long as growth continues at the current pace and labor market conditions don't ease, the Fed is likely to tighten again." At the

Chicago Board of Trade

today,

fed funds futures contracts fell, discounting 92.4% odds of a rate hike at the Fed's first meeting of the new year on Feb. 1-2, up from 77.3% yesterday.

But at the same time, market analysts said light volume and low interest in bonds in a world where many

Nasdaq Stock Market

issues return more in a day than bonds return in a year intensified today's action.

"Most people were surprised by the extent of the selloff," said Walter Burke, senior technical analyst at

MCM Moneywatch

. "But it's sort of a thin market. The important news is over for the year economy-wise, and with Y2K concerns, the market is going to dry up here. Large moves are more likely because the market's not as deep as it usually is."