Treasuries Post Worst Week Since November as Oil Extends Rally

  • Gauge of inflation expectations rises by most in seven weeks
  • Yields on U.S. two-, 10-, and 30-year debt climb for fifth day

Treasuries fell, posting their worst week since November, as a rebound in oil prices led traders to boost wagers that inflation will climb and strengthened the Federal Reserve’s case to raise interest rates this year.

The yield on 30-year U.S. bonds, the maturity most sensitive to inflation expectations, rose as crude oil gained for a fourth day. A bond-market gauge of inflation expectations had its biggest weekly advance in almost two months before the Fed’s policy committee meets April 26-27.

Inflation expectations have rebounded after falling in February to the lowest level since 2009 as oil has rallied from a 12-year low. The Fed is looking for inflation to rise to its 2 percent target as it seeks to raise rates even as central banks abroad maintain stimulus. Fed officials last month cut their forecasts for rate increases in 2016 to two from four, saying global economic and financial developments continue to pose risks.

"Inflation in the U.S. actually is rising and we do think you are going to get towards that target, maybe not this year, but starting into next year," said Jonathan Beinner, global fixed income chief investment officer at Goldman Sachs Asset Management, in an interview on Bloomberg Television.

U.S. 30-year yields rose two basis points, or 0.02 percentage point, to 2.70 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2.5 percent security due in February 2046 fell 14/32, or $4.38 per $1,000 amount, to 95 25/32.

Treasury 10-year note yields rose three basis point to 1.89 percent, and climbed 14 basis points this week, the most since the week ended Nov. 6.

Break-Even Rate

Hedge-fund managers and other large speculators cut bullish bets on Treasury bonds to the lowest in a month in the week ended April 19, according to U.S. Commodity Futures Trading Commission data released Friday. Net speculative positions, or bets prices will rise, outnumbered short positions by 52,975,000 contracts on the Chicago Board of Trade, the least since the week ending March 25.

The gap between yields on U.S. 10-year notes and equivalent Treasury Inflation-Protected Securities, known as the 10-year break-even rate, climbed by nine basis points this week, the most since the week ending March 4, to 1.65 percentage points.

The core consumer-price index rose at a 2.2 percent annual rate in March, according to a Labor Department report April 14. The Fed’s preferred inflation gauge, the personal consumption expenditures index, slowed to a 1 percent annual pace in February.

"With a more accommodative Fed, they could be willing to allow inflation to run a little bit above trend than might otherwise be the case," said Dan Mulholland, head of Treasury trading in New York at Credit Agricole SA.

Although futures traders are betting there’s no chance the Fed will raise rates at its meeting next week, they see a 63 percent probability that the central bank will hike by December, up from a 50 percent chance assigned a week ago.

The value of global stocks has rebounded as much as 15 percent since reaching the lowest level since September 2013 in February. Oil gained for a third week.

Other signals show investors are preparing for higher inflation. Buyers deposited $2.8 billion into U.S. ETFs holding government securities that protect against rising consumer prices as of April 21, according to data compiled by Bloomberg. That compares with $2.6 billion in all of 2015. 

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