Bond Report: Treasury yields end mixed as Fed’s Powell says it’s not clear what rise of COVID cases means for the economy

What are yields doing?

• The yield on the 10-year Treasury note TMUBMUSD10Y, 1.264% was about steady at 1.258% versus 1.255% at 3 p.m. Eastern on Monday.
• The 2-year note yield TMUBMUSD02Y, 0.209% edged higher to 0.215% from 0.205% Monday afternoon.
• The yield on the 30-year Treasury bond TMUBMUSD30Y, 1.924% traded at 1.919%, compared with 1.923% on Monday.

What’s driving the market?

Americans cut spending at retailers in July for the second time in three months, largely reflecting a decline in car sales, due to supply disruptions in the semiconductor industry, and a slide in online sales after the Amazon Prime Day sales in June.

U.S. retail sales sank 1.1% or by more than the 0.3% fall that economists surveyed by The Wall Street Journal had expected. The fast-spreading delta strain of the coronavirus may also have dampened spending last month, but it’s still too early to gauge the impact.

Meanwhile, industrial production rose a seasonally adjusted 0.9% in July, the Federal Reserve reported Tuesday. That’s the fastest pace since March and follows a revised 0.2% gain in June. The capacity utilization rate — which reflects the limits to operating the nation’s factories, mines and utilities — rose to 76.1% in July, the highest rate since the pandemic struck last year.

Other data released today showed that U.S. business inventories climbed 0.8% in June, while home builder confidence sank in August to the lowest level in over a year as home prices soar.

During an event on Tuesday, Fed Chairman Jerome Powell said the ultimate impact of COVID’s delta variant on the U.S. economy remains unknown. “I would say it’s not yet clear whether the delta strain will have important effects on the economy. We’ll have to see about that,” Powell said during a question-and-answer session with students and teachers from around the country, sponsored by the central bank.

Earlier on Tuesday, yields had fallen as investors continued to track the spread of the delta variant and a rise worldwide in COVID -19 cases. New Zealand took drastic action Tuesday, with the government putting the entire nation into a strict lockdown for at least three days after finding a single case of coronavirus infection in the community.

The continued spread of the virus is being blamed for renewed congestion at ports in China, while contributing to worries about further lockdowns and a slowdown in economic activity around the world.

Read: Worries about global growth outweigh report Fed moving closer to faster-than-expected tapering process

What are analysts saying?

• “The 0.9% m/m rise in industrial production in July was driven by a strong rebound in manufacturing output back above its pre-pandemic peak, but with many sectors still suffering from severe shortages of raw materials and workers, we suspect growth will slow again over the coming months,” Andrew Hunter, senior U.S. economist at Capital Economics, wrote in a note.
• “The market seems to be sitting at the threshold of a major bifurcation of scenarios with material implications for likely rates ranges both near-term and over the current cycle” strategist Bruno Braizinha said in a BofA Global Research note. Pessimistic scenarios may imply a “sub-1% 10yr Treasury by year-end, while optimistic scenarios may see convergence to the 1.75-2% range.” In the process of building consensus around a central scenario over the next few months, “market participants will likely be focused on the potential inflation path, the impact of COVID variants and reopening models, the Fed response function and the contingency between hikes and taper, the evolution of labor markets and the rotation between manufacturing and services gauges.”