Treasurys sink on upbeat economic news

NEW YORK (Reuters) — Treasury prices fell Friday as stronger U.S. economic data gave investors a shot of confidence in prospects for a sustained economic recovery.

Reports on November retail sales, December consumer sentiment, and October business inventories — all released on Friday — were all favorable to the economy’s growth prospects.

These reports came atop last week’s November employment report, which appeared to show the dramatic deterioration in the labor market was coming to a halt.

“We have had a steady drumbeat of data — starting last week with the November employment report and continuing with retail sales, consumer sentiment and business inventories — that give us the sense of a sustainable recovery getting under way as the year comes to a close,” said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Fla.

“This has implications for Federal Reserve policy.”

Sullivan said the improved economic data raised prospects that the Fed’s Federal Open Market Committee (FOMC) could change the wording of the statement it releases next week from its final policy session of 2009.

In that statement, the Fed “might indicate a more upbeat assessment of current economic conditions and the connotation of that would be that they might be a step closer to withdrawing some of this liquidity from the financial system and raising its fed funds target,” he said.

That prospect contributed to some flattening of the yield curve which steepened on Thursday after long bond prices fell after a poorly bid 30-year Treasury bond auction.

The curve steepening Thursday widened the spread between two- and 30-year yields to 374 basis points, the widest spread by that measure in two years.

On Friday, the curve flattened slightly with the difference between two- and 30-year yields narrowing to 371 basis points.

“You have three engines moving forward for the economy: jobs, consumer spending and confidence,” said Cary Leahey, economist at Decision Economics in New York. “It’s a better underpinning for a moderate growth story and it’s another dash of cold water on those worrying about a W for next year.”

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Both 10- and 30-year Treasury yields had broken through support at 3.50% and 4.50%.

The 10-year Treasury note was down 14/32, its yield rising to 3.56% from 3.50% Thursday.

Two-year U.S. Treasury notes fell 3/32, their yields rising to 0.82% from 0.775% Thursday.

Thirty-year bonds were down 5/32, their yields rising to 4.52% from 4.51% Thursday.

The Commerce Department said November retail sales posted the largest advance since August and the second straight monthly gain.

Consumer sentiment also improved in early December, benefiting from the labor market stabilization evident in last Friday’s November employment report, the Reuters/University of Michigan Surveys of Consumers said.

Investors also learned business inventories unexpectedly rose in October. Economists said that suggested that a long period of inventory liquidation was probably over.

The more robust signals from the economy are helping to give investors second thoughts about the relative riskiness of government debt.

“You’re getting a lot of global indications that demand for government debt is becoming a bit more uncertain,” said Pierre Ellis, senior economist at Decision Economics.

First Published: December 11, 2009: 12:54 PM ET