Treasury 30-Year Bonds Gain Amid Slump in Oil Prices

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Treasury 30-year bonds rose, with yields declining the most in almost three weeks, as plunging oil prices added to investor expectations that inflation will remain subdued while the U.S. economy strengthens.

The yield difference between 30-year bonds and similar-maturity Treasury Inflation Protected Securities this year has declined by the most in three years. West Texas Intermediate crude oil dropped to a three-year low after Saudi Arabia cut prices. Treasuries pared gains after Federal Reserve Bank of St. Louis President James Bullard said a decline in the price of crude is bullish for the economy.

“The market is very focused on the drop in oil,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors.

U.S. 30-year yields, among the most sensitive to the outlook for inflation, declined two basis points, or 0.02 percentage point, to 3.05 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They sank as much as five basis points, the most since Oct. 16. The 3.125 percent security due in August 2044 rose 10/32, or $3.13 per $1,000 face amount, to 101 1/2.

Benchmark 10-year note yields fell one basis point to 2.33 percent after sinking earlier as much as four basis points.

Bullard Comments

Treasury bonds pared gains after Bullard said he’s optimistic about the U.S. economic outlook. There’s no need for the Fed to consider another round of bond purchases under quantitative easing as slowing growth in Europe, China isn’t affecting the U.S. recovery, he said in Fox Business Network interview. Policy makers said last week they were ending the third round of bond-buying.

“Bullard’s remarks were fairly positive,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “This was a guy who a week-and-a-half ago said we should keep quantitative easing going because of inflation expectations. Now today he came out and said we made the right decision in canceling it.”

Risks presented by U.S. midterm elections today, the European Central Bank meeting Nov. 6 and U.S. nonfarm payrolls data released by the Labor Department Nov. 7 led some investors to pare Treasury holdings.

“People are trying to get their risk down ahead of all these” events, said Thomas di Galoma, head of rates and credit trading at ED&F Man Capital Markets in New York.

Low Inflation

Treasury yields extended declines earlier after a report showed the trade deficit in the U.S. widened in September as exports cooled from a record, highlighting how weakening global growth will affect the world’s largest economy. The gap grew by 7.6 percent to $43 billion, the largest since May, from $40 billion in August, Commerce Department figures showed.

West Texas Intermediate crude slid 2.1 percent to $77.15 a barrel in New York and reached $75.84, the lowest level since October 2011.

The U.S. economy has gained as inflation indicators have remained low, data have shown. Gross domestic product in the third quarter grew at a 3.5 percent annualized rate, the Commerce Department reported last week, after a 4.6 percent gain from April through June.

The personal consumption expenditures price index, the Fed’s preferred gauge of inflation, has been below policy makers’ 2 percent target for more than two years.

Shrinking Difference

The yield difference between 30-year bonds and similar-maturity TIPS, a gauge of traders’ bets on consumer prices over the life of the securities, was 2.08 percentage points. The spread has shrunk 28 basis points in 2014, the most since 2011, and declined to 1.99 percentage points last month, the least in three years.

Demand for long-term debt can be seen in the shrinking difference between U.S. five- and 30-year yields. The spread touched 141 basis points, the least since Oct. 8. It closed Oct. 3 at 140 basis points, the narrowest since January 2009.

Treasury 30-year bonds have returned 21 percent in 2014 through yesterday, compared with 0.8 percent for two-year notes, Bank of America Merrill Lynch indexes show.

The Bank of Japan’s unexpected announcement last week that it would expand monetary easing to fuel inflation helped spark a bond-market rally. The nation’s 30-year government bond yield fell to as low as 1.40, the least since April 2013. Japan’s Government Pension Investment Fund said it would boost holdings of foreign assets.

‘Well Bid’

German 10-year yields fell to 0.80 percent, four basis points above the Oct. 15 closing low of 0.76 percent, as investors bet ECB policy makers meeting in two days will fail to stimulate the euro-area economy enough to stop it from lagging behind the U.S.

“You have core markets that are well bid” in Japan and Germany, said Richard Gilhooly, an interest-rate strategist in New York at Toronto-Dominion Bank’s TD Securities unit, one of 22 primary dealers that trade with the Fed. The BOJ’s efforts to weaken the yen and the GPIF’s holdings decision “tell you it’s only a matter of time before 30-year yields in the U.S. go back under 3 percent, and probably retest the 2.80 percent area.”

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