U.S. Treasury debt yields fell on Wednesday as disappointing data on U.S. retail sales revived bets the Federal Reserve might leave interest rates near zero for a longer period in a bid to keep the economic recovery on track.
The decline in bond yields was limited by worries about demand for this week's longer-dated supply. Wednesday's $24 billion in 10-year notes was met with solid demand. The U.S. Treasury will sell $16 billion of 30-year bonds on Thursday.
"The knee-jerk reaction to the retail sales data was disappointment. You see bonds rallying a bit," said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.
In afternoon U.S. trading, medium-dated Treasury yields fell the most on the day on views the Fed's boosting interest rates might not occur until the latter part of 2015. Five-year yields fell 3.4 basis points to 1.581 percent, while the yield on benchmark 10-year Treasurys was 2.417 percent, down 2.5 basis points.
Bond yields were higher overnight on overseas selling before news that American spending at stores and gasoline stations did not grow in July. Economists polled by Reuters had projected a 0.2 percent gain.
The selling pressure from this week's $67 billion in coupon-bearing government bond supply has been offset by a steady bid for safe-haven Treasurys on worries about conflicts in Iraq, eastern Ukraine and Gaza.
Ten-year yields have not strayed far above last week's 14-month low of 2.349 percent. The latest 10-year note issue due August 2024 was sold at a yield of 2.439 percent, the lowest since June 2013.
"There's a lot of foreign demand for safe-haven (investments) and domestic demand due to geopolitical concerns," said Gene Tannuzzo, portfolio manager with Columbia Management in Minneapolis.
In addition to government supply, investors have bought $14.1 billion in new investment-grade corporate bonds in the past two days, which was the bulk of the $15 billion to $20 billion in supply in that sector expected this week, according to IFR, a unit of Thomson Reuters.
As traders prepared for the rest of this week's bond supply, they have kept an eye on developments abroad and whether conditions might worsen and become a drag on the global economy.
Ukraine denounced Russia's aid convoy heading for its eastern border, a move Kiev and the West see as a pretext for an invasion of the region. Meanwhile, Israelis and Palestinians have not reached a deal to end a month-long war in Gaza as a three-day ceasefire comes to a close.
The Federal Reserve bought $423 million in Treasury Inflation-Protected Securities, the latest transaction in its bond purchase program that is expected to wind down in October.
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