A specialist trader works at his post on the floor at the New York Stock Exchange (NYSE) in New York City, US.  (Reuters Photo)

By Matt Tracy

WASHINGTON- US Treasury 10-year yields rose from 16-month lows on Tuesday after news that retail sales in the world’s largest economy increased unexpectedly last month, suggesting there is no urgency for the Federal Reserve to do a supersized rate cut of 50 basis points on Wednesday.

The Fed is widely expected to cut interest rates following a two-day meeting starting on Tuesday. The size of the rate reduction, however, is still very much up in the air.

Following the retail sales data, benchmark 10-year Treasury yields fell to 3.599 percent , their lowest since May 2023, but subsequently rallied to their current 3.642 percent .

Benchmark yields hit the day’s high following a 20-year note auction that was met with underwhelming demand. The 2.51-to-one bid-to-cover ratio was the lowest since May, while primary dealers, who step in when buyers are scarce, bought 18.6 percent  of $13 billion up for sale, which is the highest percentage since February and the second most in more than three years.

“This is an indication that institutional investors pulled back risk ahead of tomorrow’s Fed meeting, questioning whether the bond market is ahead of itself,” said Tom di Galoma, head of fixed income trading at Curvature Securities.

On the short end of the curve, the two-year yield rose after hitting its weakest level in two years on Monday. It was last up 3.7 basis points to 3.592 percent .

US retail sales surprisingly increased 0.1 percent  in August, after an upwardly revised 1.1 percent  surge in July. Economists polled by Reuters had forecast retail sales falling 0.2 percent  last month.

After the report, US rate futures priced in a 65 percent  chance of a 50-bp easing on Wednesday, with a 35 percent  probability of a 25-bps move, LSEG estimates showed. Futures traders have also factored in about 120 bps in cuts this year and 245 bps through September next year. – Reuters