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Treasurys fall on strong retail sales

February 14, 2008 | "CNNMoney.com"

Traders abandon safe haven after January retail report shows unexpected increase in consumer spending.

Treasury prices fell Wednesday after a new retail sales report showed an unexpected increase in consumer spending for January after the dismal holiday season.

The Commerce Department said retail sales rose 0.3% last month, compared with a Thomson/IFR forecast for a drop of 0.3%.

Sales had fallen 0.4% in December as retailers suffered through their worst holiday shopping season in five years. So investors saw Wednesday's news as a possible indication that the weak consumer activity seen at the end of 2007 may have come to an end.

Treasurys, which are perceived as safe assets and tend to perform best when the economy is in peril, fell on the news.

The benchmark 10-year Treasury note dropped 7/32 to 98 17/32 with a yield of 3.68%, up from 3.67% late Tuesday. Prices and yields move in opposite directions.
The 30-year long bond dropped 21/32 to 98 8/32 with a yield of 4.49%, up from 4.47%.

The 2-year note was down 1/32 at 100 12/32 with a yield of 1.91%, down from 1.92%.

Consumers haven't given up just yet

There is a lively debate among analysts as to whether the economy is in a recession. Technically, a recession consists of two straight quarters of economic shrinking and can only be declared in hindsight. But months of soft housing, manufacturing and labor data and ongoing problems for the credit markets have caused many economists to speculate that the economy has indeed started to contract.

Larry Rothman, a senior analyst at DebtVisions, said he is in the camp that thinks the economy is in recession and that the latest report did not alter that view.
"The headline was better than expected, but if you look at the report's details, it doesn't look that good," Rothman said. Most of the increase was due to money spent on gasoline, rather than on consumer goods, he said.

In addition, a stream of reports from retailers last week showed largely disappointing results for individual companies. And much of January's retail sales likely consisted of items bought at post-holiday clearance sales and gift card redemptions, according to Rothman.

In other data news, the Commerce Department said businesses built up their stockpiles of merchandise in December at the fastest pace in 17 months. Inventories rose 0.6% in December, above the 0.4% rise forecast by Thomson/IFR.

Buffett offer spotlights financial sector woes

The monthly inventory figures seldom move the stock or bond markets, mostly because many of its components have been previously reported.
Demand for Treasurys on Tuesday had been fueled by market rumors that a money market fund at a large money center bank may end up giving returns to consumers that are below the amounts they put into the fund, according to Action Economics.

Money market funds are a common and usually reliable savings vehicle. But in recent months the credit market squeeze has made consumers worry that they may not get a dollar-for-dollar return on investment, an unfortunate event that is known as "breaking the buck." There was no announcement.

Meanwhile, there were new worries about another market that does not usually receive a lot of attention, student loan securities. On Tuesday, First Marblehead, which creates pools of student loans and sells them, said it was concerned there was little interest in loan-backed securities. That's because investors made wary by bad mortgage-backed assets appear to be turning away from student loan-backed instruments as well.

A recent sale of student loan-backed assets by Goldman Sachs (GS, Fortune 500), JP Morgan Chase (JPM, Fortune 500) and Citigroup (C, Fortune 500) did not attract interest, according to media reports.


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