Treasuries Gain Before 30-Year Auction as Global Bonds Advance

  • Debt offering follows strong 10-year note sale Wednesday
  • Longer-dated Treasuries have returned more than 3% this month

Treasuries advanced as diminished global appetite for risk assets fueled demand for government debt before the U.S. auctions $13 billion of 30-year bonds.

The securities to be sold traded at the lowest auction yield since April as falling inflation expectations boosted longer-dated debt. Federal Reserve Bank of St. Louis President James Bullard said the recent decline in oil prices may delay the return of inflation to the central bank’s 2 percent target. A Wednesday auction of 10-year securities was deemed “outstanding” in a survey of five primary dealers conducted by Bloomberg.

U.S. bonds gained as sovereign-debt yields fell to record lows in Japan, China, South Korea and Taiwan after Asian and European stocks declined. Investors seeking havens amid plunging commodity prices and market turmoil emanating from China have supported fixed-income assets, with longer-dated Treasuries returning more than 3 percent this year, according to Bloomberg bond index data.

"A stable- to low-inflation environment where there’s modest growth has investors moving out the yield curve," said Dan Mulholland, head of Treasuries trading in New York at Credit Agricole SA. "There’s been some asset allocation away from commodities and equities, and that money is finding its way in the Treasury market."

Treasury 30-year yields declined one basis point, or 0.01 percentage point, to 2.87 percent as of 11:52 a.m. New York time, according to Bloomberg Bond Trader data. The 3 percent security due in November 2045 rose 9/32, or $2.81 per $1,000 face amount, to 102 20/32. The yield touched 2.82 percent on Wednesday, the lowest since Oct. 5.

‘Becoming Worrisome’

Ten-year note yields fell two basis points to 2.08 percent, after reaching 2.04 percent on Wednesday, the lowest since Oct. 28.

“With renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome,” Bullard, one of the most vocal policy makers in recent months arguing to raise interest rates, said in prepared remarks in Memphis, Tennessee. While central bankers typically “look through” oil price changes, “one circumstance where one may be more concerned is when inflation expectations themselves begin to change due to the changes in crude oil prices,” he said.

A bond-market gauge known as the 10-year break-even rate shows investors anticipate inflation will rise by about 1.45 percent per year over the next decade. The measure, which represents the difference between yields on 10-year notes and inflation-protected equivalents, fell as low as 1.42 percentage points earlier Thursday, the lowest since October.

Bond Auction

Bullard has been “quite hawkish recently” so his comments “represent a significant turn in his opinion,” Thomas Simons, economist at Jefferies Group LLC, said in note. Bullard’s comments suggest that the Federal Open Market Committee’s 2016 voters “might not be quite as hawkish as we thought,” Simons wrote.

The 30-year bonds due to be sold Thursday yielded 2.87 percent in pre-auction trading. That compares with 2.978 percent at a previous sale in December and would be the lowest at a 30-year sale in nine months.

Traders are pricing in about a 31 percent chance the Fed will raise interest rates at or before its March meeting, down from 51 percent at the end of last year. The probability is based on the assumption that the effective Fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.

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