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Bonds round-up: Retail sales strength saps US bonds

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Date: Thursday 12 Jun 2008

LONDON (ShareCast) - Better than expected US retail sales data sparked selling of US treasuries today.

Tax rebates from the government are doing the trick in boosting consumer spending, as US retail sales rose twice as fast as economists had expected, advancing 1% in May after climbing an upwards revised 0.4% in April. With petrol purchases excluded, sales rose 0.8% in May.

The yield on the ten-year benchmark note hit a new high for 2008, rising 11 basis points to 4.18%.

The trend in US import prices was also bearish for bonds. Import prices rose 2.3% in May after rising 2.4% in April, to stand 17.8% higher than in May 2007. The year-on-year rise is the highest since records began in September 1982.

The data lends support to fears that the enduring weakness of the US dollar is having a detrimental effect on inflation.

The May rise was, however, less than the 2.6% increase economists had been forecasting and with petroleum imports excluded the rise was only 0.5%.

The Treasury is due to auction $11bn of 10-year notes later today.

In the UK, gilts were also on the downturn though less so than their US counterparts, after a Bank of England survey indicated the UK public is bracing itself for an acceleration in the inflation rate.

The poll indicated that the UK consumers believe the inflation rate is now running at 4.9%, versus the 3.9% rate seen in February.

The results will set alarm bells ringing at the central bank and may encourage it to raise interest rates to head off the inflation threat.

The UK Debt Management Office sold £3.1bn of bonds due 2013 today at an average yield of 5.3%.

The yield on the five year gilt rose 10 basis points to settle at 5.3%, in line with the yield on the auctioned gilts. Meanwhile, the 10-year gilt’s yield climbed 3 ticks to 5.16%

Inflation was also on the minds of European bond investors after European Central Bank council member Axel Weber restated the bank’s view that it will consider lifting interest rates to contain inflation.

The yield on the 10-year bund rose 5 basis points to 4.60%.

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