US Treasury Bonds Fall as Strong Retail Sales Raise Doubts Over Rate Cuts

U.S. government bonds dropped sharply after stronger-than-expected retail sales data for September fueled doubts over how quickly the Federal Reserve might lower interest rates. The selloff pushed Treasury yields higher by as much as seven to 10 basis points, with short-term bonds initially leading the rise as traders reduced bets that the central bank will cut rates at its upcoming meetings.

Initially, shorter maturities were the focus of the selloff, as traders adjusted their expectations for near-term rate cuts. However, while short-term yields retreated from their session highs later in the day, yields on longer-term bonds, including 10- and 30-year Treasuries, continued to rise.

“The market has been anticipating weaker economic data, but that has not been the consistent trend,” said Tom di Galoma, head of fixed income at Curvature Securities. He noted that although a November rate cut is still likely, confidence in that outlook has been fading among many market participants.

Swap contracts, which traders use to predict future Federal Reserve actions, reflected a shift in expectations. As of Thursday, markets were pricing in around 41 basis points of rate cuts over the Fed’s November and December meetings, down from 45 basis points earlier in the week. By January, the outlook shows 59 basis points of cuts expected, suggesting some doubt over whether the Fed will reduce rates at that meeting as well.

The shift in sentiment followed a government report that showed September retail sales rose more than forecast, with August figures also revised higher. Adding to the uncertainty, initial jobless claims for the week unexpectedly fell, further dampening hopes that the economy is on the verge of slowing—a key factor for those betting on faster rate cuts.

Yields on longer-dated bonds stabilized following large block trades in Treasury futures, particularly involving the Ultra Bond contract, which tracks longer-term debt. These trades were seen as attempts by buyers to capitalize on lower prices. However, a large block trade in December futures near the end of the session led to fresh lows in the Ultra Bond contract, causing the yield curve to steepen further.

The latest drop in Treasuries leaves the market on track for its first monthly decline since April, according to a Bloomberg index. “Higher long-term growth without a recession would suggest higher long-term yields,” said George Catrambone, head of fixed income at DWS Americas, adding that rising odds of a Trump victory in the upcoming U.S. election are contributing to the bond market’s movement.

With the U.S. presidential election just weeks away on November 5, financial markets have reacted to predictions that Donald Trump could win, given his support for looser fiscal policy and steep tariffs that could widen the federal deficit and fuel inflation. Bond market volatility is expected to remain elevated as investors await key data, including the Treasury’s quarterly bond sale announcement on October 30, October’s jobs report on November 1, and the Federal Reserve’s policy decision on November 7.

As Election Day approaches, investors are bracing for potentially large swings in bond yields. The MOVE Index, which tracks expected Treasury market volatility, surged from 100 to 124 on October 7—the largest one-day jump since 2020—as Election Day moved into its 30-day window.