10-year Treasury yield falls below 3.5% after weaker-than-expected retail sales

The 10-year Treasury yield fell Thursday, as markets digested a disappointing retail sales report that added to concerns the Federal Reserve’s aggressive rate hiking campaign could lead to a recession.

The yield on the benchmark 10-year Treasury note was down by more than 5 basis points at 3.45%, while the yield on the 30-year Treasury bond slipped 5 basis points at 3.488%. The 2-year yield was also lower by nearly 4 basis points at 4.211%. Yields move inversely to prices.

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Retail sales came in weaker than expected, falling 0.6% in November, according to the Commerce Department. That was below Dow Jones estimates of a 0.3% decline.

The Fed’s hike on Wednesday marked a slowdown from the previous four increases of 75 basis points. The central bank indicated that rates will remain higher throughout 2023, with cuts unlikely until 2024. It also projected that the “terminal rate” will rise to 5.1% before the end of the hiking cycle.

“Overall, we expected to hear Chair Powell emphasize that the ‘hard part’ of returning inflation to 2.0% is just beginning. We largely received that message,” Bank of America’s Michael Gapen wrote in a Wednesday note.

“The Fed remains willing to risk a recession in the labor market in order to bring inflation down and, if anything, the December projections suggest that risk has risen, not diminished. We agree and continue to look for a recession in 1H 2023 and a sharper rise in the unemployment rate than the median FOMC member projects,” Gapen added.