Treasury Yields Climb as Oil Rebound Soothes Inflation Concern

  • U.S. two-year yields rise in longest streak since June
  • September Fed interest-rate increase remains in view

Treasuries fell as a rally in crude oil drove a rebound in inflation expectations, since faster price increases erode the value of long-term debt.

U.S. two-year note yields rose for a fifth day, the longest streak since June, as oil posted the biggest three-day gain in 25 years, relieving concern about persistently low inflation. After a weeks-long slump, prices rebounded after OPEC said it’s ready to talk to other producers to achieve "fair prices" and the U.S. government reduced its crude output estimates.

"Everybody believed inflation was not an issue, but all of a sudden this big turnaround in oil -- it looks to me like a short squeeze -- is really the primary factor driving bond prices lower," said Thomas di Galoma, head of fixed income, rates and credit at ED&F Man Capital Markets, a brokerage firm in New York. "This is mostly an oil story." A short squeeze is when traders with positions that profit from declines in an asset are forced to offset those positions.

The 10-year yield added four basis points, or 0.04 percentage point, to 2.22 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The two-year note yield rose two basis points to 0.74 percent.

Oil Advance

Crude oil prices surged 8.8 percent to close at $49.20 a barrel on the New York Mercantile Exchange, after dropping as much as 3.6 percent.

The Bloomberg U.S. Treasury Index was on pace for a monthly gain of 0.1 percent as of Aug. 28. It is up 1 percent for the year.

Short-term Treasuries underperformed, driven by the view that a September rate increase is still a possibility, as indicated by interviews with Federal Reserve officials during the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming.

Two-year yields, among the most sensitive to what the central bank does with its rate target, were poised for their fifth-straight monthly climb. The last time they advanced for that long was in 2006, the most recent time the Fed raised rates.

Futures contracts indicate there’s a 40 percent chance of a Fed shift in September, the highest since Aug. 18, according to data compiled by Bloomberg. The figures are based on the assumption that the benchmark will average 0.375 percent after the first increase. The Fed’s target for its benchmark is a range of zero to 0.25 percent.

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