Treasuries Gain as Drop in Commodities Damps Inflation Outlook

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Treasuries rose for the first time in four days as declining commodity prices sapped the outlook for inflation and boosted demand for fixed-income securities.

U.S. government bonds extended gains after a report showed manufacturing in the New York region slumped at the fastest pace since the depths of the last recession. A Bloomberg index of commodities dropped to its lowest level since early 2002, weighing on inflation expectations as investors debate when the Federal Reserve will raise interest rates.

“The trend toward lower yields continues,” said Edward Acton, a U.S. government-bond strategist at RBS Securities in Stamford, Connecticut. “It’s a commodities story for the most most part.”

Benchmark U.S. 10-year note yields fell three basis points, or 0.03 percentage point, to 2.17 percent as of 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The yield had increased six basis points over the previous three days. The 2 percent security due in August 2025 rose 1/4, or $2.50 per $1,000 face amount, to 98 1/2.

The Federal Reserve Bank of New York’s Empire State index plunged to minus 14.9 in August, the lowest since April 2009, compared with estimates for a gain to 4.5 in a Bloomberg News survey of economists. Readings below zero signal contraction. Gauges of orders and sales also retreated.

Commodities Slump

The Bloomberg Commodity Index fell for a fifth day, slipping 0.4 percent.

The yield gap between Treasury two- and 10-year notes has narrowed in the past month amid waning inflation expectations. The spread shrank to about 146 basis points Monday from this year’s high of 178 basis points set July 13.

“It’s an underlying story of economic weakness,”said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There’s a natural bid in all of global fixed income.”

Futures show that traders see a 48 percent chance the Fed will raise borrowing costs at its next meeting on Sept. 16-17, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

Investors will be listening for signals on policymakers’ intentions when Fed Bank of Minneapolis President Narayana Kocherlakota and San Francisco Fed President John Williams deliver speeches this week. The central bank will release minutes from its July meeting on Wednesday, hours after the government unveils consumer-price data for July.

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