U.S. 30-Year Bond Yields Advance Before Yellen Speech

Treasury 30-year bonds fell for a second day as investors considered prospects for higher interest rates before Federal Reserve Chair Janet Yellen speaks to a conference this week in Jackson Hole, Wyoming.

Long-bond yields jumped from almost a 15-month low even as data showed the cost of living increased last month at the slowest pace in five months, adding to bets low inflation will give the Fed time to raise interest rates gradually. The central bank will release the minutes of its July meeting tomorrow. Stocks rallied, lessening the refuge appeal of U.S. government securities.

“I expect the minutes to be slightly hawkish, as more governors become a little concerned with the stated Fed policy and improving labor markets,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “I expect Yellen’s comments on Friday to be slightly dovish.”

Thirty-year yields increased two basis points, or 0.02 percentage point, to 3.21 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader data, after dropping earlier to 3.16 percent. They touched 3.10 percent on Aug. 15, the lowest level since May 2013. The price of the 3.125 percent security due in August 2044 declined 9/32, or $2.81 per $1,000 face amount, to 98 10/32.

Ten-year note yields rose less than one basis point to 2.40 percent after falling to 2.36 percent and rising to 2.41 percent. They reached 2.30 percent on Aug. 15, the least since June 2013.

“I wouldn’t be in longer-term Treasuries, given how low yields are in the economic cycle,” Pollack said. “I would be in the five- to seven-year range. At the end of next year is when the Fed will be raising rates.”

Global Bonds

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $214 billion, from a one-month low yesterday of $185 billion. The average daily volume this year is $325 billion. It reached $504 billion on Aug. 1, the highest level in three months.

A gauge of Treasury-market volatility rose for a third day. Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, was at 62 basis points, the highest since Aug. 8’s 62.5 basis points. The average this year is 59.1 basis points.

The extra yield U.S. 10-year notes offer over their Group of Seven nations counterparts was 74 basis points, the highest level since reaching 78 basis points on July 31. That compared with as little as 37 basis points in February.

Low Inflation

Tepid inflation from the U.S. to the U.K. and Germany is threatening to slow economic expansion, boosting bonds. The Bloomberg Global Developed Sovereign Bond Index rose 4.9 percent this year through yesterday, erasing the 4.6 percent drop in 2013.

British sovereign debt gained as U.K. inflation cooled more in July than economists forecast. Ten-year gilt yields dropped three basis points to 2.40 percent, approaching a one-year low. German 10-year bunds fell as much as three basis points to 0.99 percent.

“Treasuries are attractive on a relative basis to other sovereigns,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the U.S. central bank.

Haselmann said he’s bullish on U.S. government securities and expects the 30-year bond yield to drop below 3 percent by year-end.

Jackson Hole

Policy makers at the Fed’s July 29-30 meeting trimmed monthly bond purchases to $25 billion while keeping the benchmark interest-rate target in a range of zero to 0.25 percent, where it’s been since December 2008. They said in a statement that “significant underutilization of labor resources” persists.

Yellen will speak at the Kansas City Fed’s Jackson Hole symposium on Aug. 22. The focus of the three-day event, which begins Aug. 21, is the labor market.

The conference of central bankers and economists has an agenda-setting reputation. In 2010 and 2012, then-Fed Chairman Ben S. Bernanke signaled new rounds of bond purchases that have pumped up the Fed’s balance sheet to a record $4.4 trillion.

Undesirable Slack

Yellen will probably avoid taking a hawkish stance, according to Wall Street banks. She’s expected to repeat her view on “undesirable” slack in the labor market, Kevin Logan, chief U.S. economist at HSBC Securities USA Inc., a primary dealer, wrote in a note to clients.

Geopolitical tensions with Ukraine and Russia and turmoil in the Mideast give the Fed the excuse to delay “more hawkish rhetoric,” research analysts at the primary dealer Credit Suisse Group AG including Dana Saporta wrote in a client note.

Traders saw a 48 percent chance the Fed will increase its benchmark interest rate to at least 0.5 percent by July 2015, compared with a 65 percent likelihood at the end of last month, futures contracts show.

The difference between yields on five-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of the outlook for consumer prices over the life of the debt, touched 1.89 percentage points, the narrowest since April 17. The average for the past decade is 1.94 percentage points.

Consumer Prices

The U.S. consumer price index rose 0.1 percent from a month earlier, matching the forecast of economists surveyed by Bloomberg, after rising 0.3 percent in June, Labor Department data showed. Overall consumer prices gained 2 percent in the 12 months ended July, also matching forecasts, following a 2.1 percent advance the prior month.

Even the muted increase in prices is damping wages. Hourly earnings were unchanged on average last month after adjusting for inflation, another Labor Department report showed today. They were also little changed over the past 12 months.

“Since so much has been made out of looking for early signs of wage inflation, it’s consistent with a Fed that’s going to be comfortable with a low-rate environment for several quarters,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Treasuries erased earlier gains as investors’ risk appetite rose after a Commerce Department report showed U.S. housing starts rose in July to the highest in eight months. The Standard & Poor’s 500 Index of stocks gained 0.5 percent.

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