Treasury Bonds Post Back-to-Back Weekly Gain on Fed Prospects

  • Oil falls below $40 a barrel for first time since August
  • Fed liftoff expectations help cap U.S. inflation outlook

Thirty-year Treasuries logged their first back-to-back weekly gains since August as the prospect that the Federal Reserve will raise interest rates next month and declining oil prices dimmed inflation prospects.

Minutes of the Fed’s October meeting, released this week, showed policy makers sought to signal a possible rate boost as soon December and that additional increases would occur gradually. The Fed’s message, combined with falling commodity prices, drove longer-dated Treasuries to outperform. Those maturities are most sensitive to inflation prospects.

“The Fed has made the promise not to go too quickly,” said Gennadiy Goldberg, a New York-based U.S. rates strategist with TD Securities, one of the 22 primary dealers that trade with the Fed. “Inflation is still low.”

Thirty-year yields fell three basis points this week, or 0.03 percentage point, to 3.02 percent, according to Bloomberg Bond Trader data. The price on the 3 percent security due in November 2045 rose about 5/8, or $6.25 per $1,000 face amount, to 99 19/32. The benchmark 10-year note yielded 2.26 percent, little changed on the week.

Traders are pricing in a 68 percent probability that the Fed will lift its benchmark from near zero in December, and are signaling that the fed funds rate will still be below 1 percent in a year. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

Sliding commodities prices are helping lower inflation expectations. Oil has slumped almost 50 percent in the past year, dipping below $40 a barrel this week for the first time since August. The Fed’s preferred price-growth gauge has been below its 2 percent goal since 2012.

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