CORRECTED-TREASURIES-Yields rise on strong January retail sales data

(Corrects 9th paragraph to show the yield curve had peak inversion of -91.3 basis points on Tuesday, not steepened) By Matt Tracy WASHINGTON, Feb 15 (Reuters) - U.S. Treasury yields rose on Wednesday after the latest retail sales data came in stronger than expected, further raising market expectations of tighter Federal Reserve monetary policy in the months ahead. Retail sales surged 3.0% in January after two straight monthly declines, the Commerce Department said on Wednesday. Economists polled by Reuters had forecast sales would increase 1.8%, with estimates ranging from 0.5% to 3.0%. Traders viewed the data as an influential factor in the Federal Reserve's monetary policy, as it indicates economic strength despite higher borrowing costs. "The Fed's been very clear that they believe they have a ways to go with rates, and that it would be data-dependent," said Michael Lorizio, senior fixed income trader at Manulife Investment Management. "As the data has evolved, now the market is coming back towards the Fed's predications, because the data has been supportive of that," he added. Benchmark 10-year note yields rose as high as 3.791%, their highest since Jan. 3, reflecting market expectations that the Fed keeps interest rates higher for longer. Two-year yields climbed as high as 4.703%, their highest since early November. The two-year is particularly sensitive to movements in rate expectations.

"The long end of the curve could continue to struggle to find support," Lorizio said. "The hopes of cutting in the near term are going away as long as the data continues to surprise to the upside." The yield curve between two-year and 10-year notes was last inverted at minus 85.1 basis points, from Tuesday's peak inversion of minus 91.3 basis points on Tuesday. Wednesday's retail sales report follows the release yesterday of stronger than expected consumer price index data, which showed inflation accelerated in January. Headline prices increased 0.5% month-over-month while core prices rose 0.4% month-over-month, in line with forecasts. However, on an annualized basis, both headline and core prices rose slightly more than expected. , Two U.S. central bank officials put investors on notice that borrowing costs may ultimately need to go higher than previously anticipated.

"Inflation is normalizing but it's coming down slowly," Richmond Fed President Thomas Barkin said yesterday. "I just think there's gonna be a lot more inertia, a lot more persistence to inflation than maybe we'd all want." The Treasury Department is scheduled to sell $15 billion of 20-year notes on Wednesday, and $9 billion of 30-year Treasury inflation-protected securities on Thursday. February 15 Wednesday 9:57AM New York / 1457 GMT Price Current Net Yield % Change (bps) Three-month bills 4.66 4.781 -0.005 Six-month bills 4.82 5.009 -0.013 Two-year note 99-23/256 4.616 -0.006 Three-year note 99-18/256 4.3341 0.017 Five-year note 97-184/256 4.0119 0.009 Seven-year note 97-128/256 3.9138 0.015 10-year note 97-184/256 3.7761 0.015 20-year bond 100-132/256 3.9617 0.021 30-year bond 96-140/256 3.8194 0.018
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 34.50 1.50
spread
U.S. 3-year dollar swap 20.50 0.25
spread
U.S. 5-year dollar swap 7.00 0.50
spread
U.S. 10-year dollar swap -1.00 -0.25
spread
U.S. 30-year dollar swap -40.50 -1.25
spread

(Reporting by Matt Tracy; Editing by Nick Zieminski)