(Bloomberg) -- Treasuries surged in the day leading up to the US government's belated reading of labor-market data, with investors pricing in a greater chance that the Federal Reserve lowers interest rates multiple times this year.
The moves on Tuesday sent some yields to their lowest levels of the past month after data showed a loss of consumer spending momentum at the end of the holiday-shopping season, reflecting anxiety about the cost of living and slowing job growth. That sets the scene for a delayed January employment report on Wednesday that's been highly anticipated by market participants.
The retail sales data "got people more nervous about being short going into payrolls," said Michael Cloherty, head of US rates strategy at CIBC Capital Markets. "The question is whether labor market weakness will be enough to renew concerns about a recession and significant Fed easing in the next year."
Yields across maturities declined by at least four basis points. The benchmark 10-year note's fell by at by as much as seven basis points to 4.13%, the lowest level since Jan. 15. The 10-year note's yield hasn't moved more than that on the day before a jobs report release since April.
Money markets boosted to around 30% the odds of three quarter-point interest rate cuts this year, with two already fully priced in. Swaps still imply policymakers will leave rates on hold when they meet next month, however, as they did in January when they voted to keep the target range for the federal funds rate at 3.5% to 3.75%.
Shorter-maturity yields — though more sensitive to expectations for Fed rate actions — declined less ahead of a $58 billion auction of three-year notes at 1 p.m. New York time, the first of three Treasury note or bond sales this week. The auction was met with solid demand, with direct bidders awarded a record share of the sale.
The session also was marked by a raft of block trades in five- and 10-year Treasury futures contracts, apparently initiated by sellers taking profits on long positions established Jan. 16 and Jan. 20 at lower prices. The market's ability to absorb the sales without knocking prices lower attests to the strength of demand.
US retail sales were flat in December. The median economist estimate in a Bloomberg survey was for a 0.4% increase. Eight of its 13 categories posted declines. Economic releases ahead this week include January employment, delayed from last week by a government shutdown.
On Monday, National Economic Council Director Kevin Hassett said lower US jobs numbers can be expected in the months ahead. Growth in nonfarm payrolls has already slowed over the past five years, and payrolls contracted three times in the past year.
"It's still to be determined if we have real weakness in the labor market, and we're not seeing too much of that at this point," said Charles Ripley, a portfolio manage at Allianz Life Insurance Co. of North America. "Unless we see a material shift on employment, which we're not expecting, inflation has been pretty sticky and we're in a holding pattern for the medium term for Fed action."
Speaking Tuesday, Cleveland Fed President Beth Hammack, who was critical of the last of the Fed's three rate cuts toward the end of last year and votes on policy decisions this year, said interest rates could be on an extended hold while officials evaluate incoming economic data. Dallas Fed President Lorie Logan said she's hopeful inflation will continue to come down, though noted it would take "material" weakness in the labor market for her to support more rate cuts.
January consumer prices data also are set to be released this week on Friday. The consumer price index — an inflation gauge that over the past year has exceeded the different gauge used by the Fed for its target by about 0.1 percentage point — is estimated to have slowed to 2.5% from 2.7% in December.
This week's Treasury auctions include 10- and 30-year new issues over the next two days.
--With assistance from Edward Bolingbroke.
(Adds futures block trades and updates yield levels.)
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