Treasury 10-Year Yields Reach May 2013 Low on Commodities Drop

Treasury 10-year yields matched the lowest in 20 months as a slump in crude oil and commodities prices damped the outlook for inflation.

Benchmark 10-year notes rallied after a brief decline as a $21 billion auction of the securities drew below-average demand. Commodities prices fell to a 12-year low, fueling speculation the Federal Reserve will take a cautious approach to raising interest rates. Treasuries have gained 1.5 percent this year, after returning 6.2 percent last year, the most since 2011, according to Bloomberg U.S. Treasury Bond Index.

“We’re at levels that are nose-bleed rich,’ said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of the 22 primary dealers that are obligated to bid at the auctions. ‘‘We had a very strong rally into the event. Any cheapening is another opportunity to add to longs.” A long position is a bet that an asset will increase in value.

The U.S. 10-year yield declined one basis point, or 0.01 percentage point, to 1.90 percent at 4:59 p.m. in New York, after falling to 1.8622 percent earlier, matching the low on Oct. 15 that was the least since May 2013. The 2.25 percent note due in November 2024 gained 2/32, or 63 cents per $1,000 face amount, to 103 3/32, according to Bloomberg Bond Trader prices.

Thirty-year yields rose one basis point to 2.5 percent. It earlier touched 2.46 percent, the lowest since July 2012, when the yield set a record low of 2.44 percent.

Bond Rally

A worldwide rally in sovereign bonds pushed the effective yield on securities tracked by the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index to 1.21 percent yesterday, the least in data going back to 1996.

U.S. debt maturing in five years yielded more than similar maturities in 19 developed nations, according to data compiled by Bloomberg. The U.S. notes yielded 1.37 percent, while yields were at negative levels in Switzerland, Japan and Germany.

The Standard & Poor’s 500 Index of stocks fell 0.3 percent, erasing earlier gains.

“The bigger picture is the fade in equities and credit, driven by the leg lower in crude,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The weak auction just contributed to some volatility in bonds, but bonds have caught a bid because of the selloff in risk.

The notes yielded 1.930 percent at the auction, compared with a 1.921 percent forecast in a Bloomberg survey of seven of the Fed’s primary dealers. The yield was the lowest since May 2013.

Auction Demand

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.61 compared with the average 2.73 at the past 10 auctions.

The sale was rated a ‘2’ by four of the Fed’s primary dealers. The characterization is based on a scale of one through five, with one being a failed auction and five judging the results as outstanding.

The U.S. sold $24 billion of three-year notes yesterday, and it plans to auction $13 billion of 30-year bonds tomorrow.

Government bonds have surged this year as oil tumbled more than 55 percent since June and copper sank to the lowest since 2009, dimming the outlook for consumer prices.

The Bloomberg Commodity Index reached its lowest level since 2002. Crude oil futures gained 0.1 percent to $46.13 a barrel in New York, after reaching the lowest level since April 2009.

Inflation Measure

The difference between yields on 10-year Treasuries and similar-maturity Treasury Inflation Protected Securities, a gauge of market expectations for consumer prices, was at 1.53 percentage points, the least since 2010.

Fed officials said they plan to raise interest rates later this year after holding their target for the federal funds rate at virtually zero since December 2008 to bolster economic growth.

‘‘There’s no meaningful sign of inflation yet and that will keep the Fed from moving forward the date of the first hike,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Slower inflation may also prompt central banks to extend stimulus, keeping down borrowing costs to fulfill their mandates. The European Central Bank may make a decision on whether to start buying government debt as soon as its Jan. 22 meeting, Executive Board member Benoit Coeure was quoted as saying in an interview with Die Welt.

The Bank of America sovereign index has returned 3.1 percent in the three months ended yesterday. The MSCI All-Country World Index of shares advanced 3 percent, including reinvested dividends.

Treasuries investors turned bearish in the week ended yesterday, according to a survey by JPMorgan Chase & Co. Investors increased the proportion of net shorts to nine percentage points, from zero the previous week, according to the survey.

Outright longs were cut to 13 percent, from 17 percent the previous week. The figure represents the least longs since Oct. 27. Outright shorts, bets the securities would fall in value, rose to 22 percent, from 17 percent, which had been the least since February.

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