Here's What Treasuries Are Telling Us About Inflation: There Isn't Any

  • Baring's Mahon says no need for Fed to raise rates this month
  • Yields rise after report shows retail sales climbed in August

The Federal Reserve sees the U.S. inflation rate climbing to its 2 percent target as it prepares to increase interest rates. Treasuries are signaling that consumer prices will fall for the next year.

Baring Asset Management says inflation is slow enough to keep the Fed from raising rates when it finishes a policy meeting Sept. 17. U.S. data Wednesday will show consumer prices dropped in August for the first time in seven months, based on a Bloomberg survey of economists. U.S. retail sales climbed less than forecast in August after July’s gain was larger than previously reported.

The Fed in the minutes of its most recent meeting reiterated that policy makers expect price gains to gradually approach its target over the medium term. Bond-market measures of inflation expectations known as break-even rates show traders predict prices to drop about 1.5 percent in the next year. Costs will barely budge in the next 24 months, a similar metric indicates.

“There’s absolutely no inflation anywhere to be seen,” Christopher Mahon, the London-based director of asset allocation research at Baring Asset Management, which has $40 billion in assets, said Monday in an interview with Bloomberg. For the Fed, “there’s absolutely no need for them to hike,” he said.

Treasury 10-year note yields rose two basis points, or 0.02 percentage point, to 2.20 percent as of 9:08 a.m. in New York, based on Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 fell 6/32, or $1.88 per $1,000 face amount, to 98 6/32.

Fed Overhang

Yields rose after data showed retail sales in the U.S. climbed for a second straight month, a sign consumers may be looking past recent financial-market volatility. The 0.2 percent rise in August was lower than the 0.3 percent median forecast of 84 economists surveyed by Bloomberg, and followed a 0.7 percent gain in July, Commerce Department figures showed Tuesday in Washington.

“It came in pretty much as expected -- no real shockers,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “With the Fed overhanging the market, there’s not a lot that can shake things up between now and Thursday.”

The 30-year bond yield was at 2.98 percent, after falling to a record 2.22 percent in January. Long bonds have returned 3.6 percent in the past three months, based on data from Bank of America Corp. Because of their long maturity, the securities tend to rally most when costs are holding in check, which will protect the value of their fixed payments.

On Hold

Consumer prices declined 0.1 percent in August from July, based on responses from economists before the Labor Department report. Prices increased 0.2 percent from the year before, according to thesurvey.

Futures contracts show the odds that the Fed will boost rates this month are 30 percent, according to data compiled by Bloomberg.The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, versus the current target of zero to 0.25 percent.

China’s decision last month to devalue its currency will help keep the Fed on hold, said Michael Gapen, chief U.S. economist at Barclays Plc’s investment-banking unit in New York. The move raised concern Chinese officials are struggling to stem an economic slowdown. Barclays is one of the 22 primary dealers that trade directly with the Fed.

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