Treasury 30-Year Bonds Advance on Below-Target Inflation Outlook

Treasury 30-year bonds rose for a second day as measures show inflation remains below the Federal Reserve’s target even as faster U.S. economic growth bolsters the case for the central bank to raise interest rates next year.

The extra yield on 30-year Treasuries compared with two-year notes traded at almost the lowest in about six years as crude oil traded below $60 a barrel, spurring speculation inflation will slow and fueling demand for longer maturities. Japan’s 10-year yield fell to a record as inflation slowed for a fourth month in November, adding to central bank Governor Haruhiko Kuroda’s challenges in reflating the world’s third-biggest economy.

“The market is projecting lower long-term inflation and growth, which keeps the long-end contained,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets. “They are doing more buying on the long-end. I don’t think there are a lot of big bets being made.”

The 30-year bond yield dropped two basis points, or 0.02percentage point, to 2.82 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The 3 percent securities maturing in November 2044 added 3/8, or $3.75 per $1,000 face amount, to 103 21/32. The yield declined as much as four basis points.

Yield Gap

The extra yield 30-year bonds offer over two-year notes shrank to 207 basis points. It reached 201 basis points on Dec. 23, the lowest level since January 2009. Shorter-term Treasuries tend to track what the Fed does with interest rates, while longer maturities are more influenced by the outlook for inflation. Crude oil futures rose 1 percent to $56.40 a barrel in New York.

Treasuries have returned 5.6 percent this year, set for the best performance since 2011, according to the Bloomberg U.S. Treasury Bond Index.

The 30-year bond yield is forecast to rise to 3.44 percent at the end of June 2015, according to the median estimate in a Bloomberg News survey. The 10-year yield is projected to rise to 2.76 percent by the end of the second quarter.

The volume of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $42 billion. The daily average this year was $331 billion.

Japan Bonds

The yield on Japan’s 0.5 percent bond due in December 2024 fell to a record 0.3 percent yesterday before rising two basis points from yesterday to 0.33 percent. The 30-year yield slid to 1.225 percent, the lowest since April 2013.

Japan’s consumer prices excluding fresh food rose 2.7 percent from a year earlier in November, the statistics bureau said today, down from 2.9 percent the previous month and matching the median projection of economists surveyed by Bloomberg News.

The U.S. 10-year break-even rate, a gauge of expectations of consumer prices derived from the difference in yield between conventional Treasuries and inflation-linked securities was little changed at 168 basis points after shrinking to 158 basis points on Dec. 16, the narrowest since September 2010.

“With inflation being as benign as it is, people feel comfortable buying the back-end,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “With the prospects of the Fed raising rates, that will take hold of the front end a lot more than the back-end.”

Fed Policy

The chances of a Fed interest-rate increase by its September 2015 meeting increased to 67 percent from 53 percent on Dec. 16, the day before the Federal Open Market Committee issued its policy statement, according to futures data.

A report this week showed the U.S. economy expanded an annualized 5 percent in the third quarter, exceeding the highest forecast among 75 economists surveyed by Bloomberg. The Fed’s preferred measure of prices, a gauge tied to personal consumption expenditures, has held below policy makers’ 2 percent target for more than two years.

Fed Chair Janet Yellen signaled Dec. 17 that the central bank is on track to raise interest rates next year as the economy improves. The benchmark rate has been in a range of zero to 0.25 percent since 2008.

The government sold $104 billion of securities this week, ending with an auction of $29 billion of seven-year notes on Dec. 24, before the market closed for the Christmas holiday. Treasuries resumed trading in the U.S., while the U.K. remains shut in observance of Boxing Day, according to the Securities Industry and Financial Markets Association’s website.

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