TREASURIES-U.S. bond prices rise as retail sales disappoint
* Weak retail sales growth revive bets for U.S. bonds
* Much worse data seen needed to disrupt Fed's plan to taper
* Fed's Bernanke semi-annual congressional testimony on tap
* Fed buys $916 million bonds due 2023-2031
NEW YORK, July 15 (Reuters) - U.S. Treasury debt prices rose Monday as weaker-than-forecast retail sales growth led to expectations of disappointing second-quarter economic growth and raised bets the Federal Reserve might stick its current rate of bond-purchase stimulus. The U.S. government said on Monday retail sales increased 0.4 percent last month, half of the rise economists polled by Reuters had forecast. The slowdown led Wall Street to now expect the economy likely expanded at a meager 1 percent clip in the second quarter. Signs of the consumer sector faltering might be a roadblock on the U.S. central bank's path to begin scaling back its $85 billion monthly purchases of Treasuries and mortgage-backed securities, its third round of quantitative easing known as QE3. "The retail sales numbers were not very good. People are revising down their GDP outlook. It's going to be difficult for the Fed to taper," said Brian Edmonds, head of rates trading at Cantor Fitzgerald in New York. Treasuries yields jumped to near two-year highs a week ago since Fed Chairman Ben Bernanke said in June that the U.S. central bank may reduce its bond purchases this year if the economy continues its momentum. Better-than-expected job growth this spring has bolstered the case for the Fed to reduce its bond purchases, although most U.S. central bankers have reiterated they would like to leave short-term interest rates near zero for a protracted period even after the Fed ends QE3. "When the Fed is telling you they are data dependent the market lives and dies on every piece of information," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York. Bernanke will have an opportunity to express the Fed's current view on the economy and policy path on Wednesday and Thursday during his semi-annual testimony before Congress.
Bernanke's testimony will be released at 8:30 a.m. EDT (1230 GMT) on Wednesday. In antipication of possible surprises in Bernanke's testimony, many traders and investors moved to the sidelines. As of 2 p.m. EDT, cash trading volume totaled $156 billion, half its 20-day average, according to ICAP, the world's largest inter-dealer broker of U.S. government debt. Yields on U.S. benchmark 10-year Treasury notes were last up 8/32 in price to yield 2.562 percent, down 3.0 basis points from late on Friday. The yields have increased from around 2.20 percent before Bernanke spoke on June 19 and reached a two-year high of 2.76 percent on July 8.
DATA DETERIORATION A weaker economy may make it less likely that the Fed will reduce its buybacks, though data would likely have to turn significantly worse to affect the Fed's thinking. While Wall Street firms including Goldman and JPMorgan expected slim second-quarter U.S. growth, this might not be enough to stop the Fed from halting QE3 by next year. "It's not like you need to have the economy surging to get them to taper, you just need to have it not get dramatically weaker," said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York. The Fed views the size of its bond holdings as having a stimulative impact on the economy by holding yields lower than they would otherwise be, and the central bank is seen as unlikely to sell its holdings for some time. "We think buying will go into the second quarter of next year and so their portfolio will get a lot bigger," said Cloherty. As a part of its QE purchases, the Fed bought $916 million in debt due from 2023 and 2031 on Monday.