Treasury Bonds Charge as Inflation Gauge Falls to January Low

Updated on
Longer Treasuries Outperform

The extra yield investors demand to hold Treasury 30-year bonds over two-year notes narrowed toward the least since April as waning inflation expectations boost demand for longer maturities.

The spread between the two- and 30-year securities slid for a fourth day after shrinking to as little as 208 basis points Monday, the least since April 28. Thirty-year yields have been falling as a more-than 50 percent slide in oil prices in the past 12 months helps to push down inflation. Two-year yields are being anchored as investors speculate that the Federal Reserve will raise interest rates slowly.

“There’s a nice trend downwards for U.S. Treasury yields,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. “The inflation expectations are very low at the moment. If inflation stays low, the Fed doesn’t need to raise in September.”

U.S. 30-year bond yields were little changed at 2.82 percent as of 6:56 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.875 percent security due in August 2045 was 101 5/32. The yield dropped to 2.72 percent on Aug. 12, the lowest since April 29.

Benchmark 10-year notes yielded 2.16 percent. The two-year note yield was at 0.71 percent, making the spread to 30-year bonds 210 basis points.

Bonds Outperform

U.S. bonds maturing in more than 10 years have returned 1.6 percent this month through Monday, compared with a 0.05 percent loss on securities due between one and 10 years, Bloomberg World Bond Indexes show.

Futures show a 44 percent probability the Fed will raise its benchmark interest rate at its Sept. 16-17 meeting, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. It has kept its key rate in a range of zero to 0.25 percent since December 2008.

“I wouldn’t be surprised to see 10- or 30-year Treasuries outperform a bit more looking at how oil prices are doing,” said Jun Kato, senior fund manager at Shinkin Asset Management Co. in Tokyo. “Investors are seeing a considerably slow pace of Fed rate rises after the first one likely next month, and even the possibility of no further hikes for quite some time.”

The U.S. 10-year break-even rate, a gauge of the inflation outlook derived from the yield difference between Treasuries and index-linked securities, dropped as low as 1.56 percentage points Tuesday, the least since Jan. 20.

U.S. consumer-price growth slowed last month, according to the median estimate of analysts surveyed by Bloomberg before a report Wednesday. Inflation eased to 0.2 percent in July from 0.3 percent in June, the forecasts predict.

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