Treasuries Rise Led by 30 Years on Bets Inflation to Be Subdued

Treasuries advanced, led by 30-year bonds, before government reports on consumer and producer prices this week that analysts say will show inflation remains subdued even as the U.S. economy recovers.

Ten-year notes gained for the first time in four days as Chinese data showed industrial output and investment growth both slowed, underpinning demand for safer assets. Federal Reserve Chair Janet Yellen will speak on Thursday after saying last week the American economy still needs support from the central bank. Treasuries also rose as the Wall Street Journal reported Germany’s Bundesbank is willing to back more stimulus from the European Central Bank if staff forecasts show lower inflation.

“Long-dated Treasuries are supported by market perception that U.S. interest rates are likely to stay low given growth is not picking up at a robust pace and inflation remains subdued,” said John Stopford, head of fixed-income at Investec Asset Management in London. “There’s also a global factor. News about a slowdown in China or a weak recovery in the euro zone probably added to that view.”

The 30-year yield dropped two basis points, or 0.02 percentage point, to 3.48 percent at 7:33 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.375 percent bond maturing in May 2044 rose 10/32, or $3.13 per $1,000 face amount, to 98 1/32.

The benchmark 10-year yield declined one basis point to 2.64 percent after rising seven basis points during the previous three days.

Consumer Prices

U.S. consumer prices climbed 2 percent in April from a year earlier, compared with 1.5 percent the previous month, according to a Bloomberg News survey before the figures are released on Thursday. The number is down from as high as 5.6 percent in July 2008. The core rate, which strips out food and energy prices, is forecast to stay unchanged at 1.7 percent.

Data today will show prices for imported goods rose 0.3 percent in April, the smallest increase this year, while retail sales increased, based on economists’ responses.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was little changed today at 2.17 percentage points. The average for the past decade is 2.21.

The Fed is scaling back the bond-purchase program it has used to pump money into the economy amid signs growth is accelerating. The central bank has kept its target for overnight bank lending in a range of zero to 0.25 percent since 2008.

‘Not Convinced’

“The outperformance in longer-dated Treasuries is a sign that investors are probably not convinced that the economic recovery will be strong enough to make inflation a concern,” said Nick Stamenkovic, RIA Capital Markets Ltd. “News about economic slowdown in China help to underpin demand for safe-have assets. There’s also talk of demand from pension funds.”

China’s industrial production rose 8.7 percent in April from a year earlier, the National Bureau of Statistics said, compared with the 8.9 percent forecast in a Bloomberg New survey. Fixed-asset investment increased 17.3 percent in the first four months of the year, the slowest for the period since 2001, and home sales fell 9.9 percent.

Treasuries extended gains today after the Wall Street Journal said the German central bank was willing to back a slew of measures from the ECB next month if staff forecasts show a lower inflation outlook for 2016, citing a person with knowledge of the situation.

ECB President Mario Draghi has signaled he may add monetary stimulus at next month’s meeting because policy makers are “dissatisfied” with the inflation outlook, in part due to an increase in the exchange rate.

Treasuries returned 2.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities gained 3.2 percent and Japanese government bonds earned 1 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Nicholas Reynolds, Keith Jenkins

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