Treasuries Post Weekly Gain With Inflation Absent Before Fed

A decline in wholesale inflation and a renewed drop in crude oil prices is making investors more confident to own Treasuries before the Federal Reserve meets next week to consider raising interest rates later this year.

U.S. debt posted a weekly gain and risk sentiment ebbed after a report showed the producer price index unexpectedly declined last month and was down from a year earlier. The Fed, which has pledged to be “patient” on tightening monetary policy, is caught between a strengthening labor market and a stagnant inflation environment.

“Any low inflation number is good for Treasuries,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 22 primary dealers that are obligated to bid U.S. debt sales. “It suggests liftoff is probably quite a ways away.”

Benchmark 10-year yields were little changed at 2.12 percent as of 4:59 p.m. New York time. The yield dropped 13 basis points, or 0.13 percentage point, this week.

The securities posted the biggest weekly gain since January as global investors facing negative yields in Europe from European Central Bank buying are drawn to higher-yielding U.S. securities.

Risk Recedes

Stocks fell, with the Standard & Poor’s 500 Index declining for a third straight week, amid speculation a stronger dollar will weaken earnings growth, prompting risk-off sentiment.

“It’s general risk-off,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer. “The stronger dollar is putting pressure on stocks.”

Crude oil futures traded below $45 a barrel in New York on increased production forecasts and the International Energy Agency projection that record U.S. inventories may begin to strain the country’s storage capacity. The PPI dropped 0.5 percent in February and 0.6 percent from a year ago.

The difference between yields on 10-year Treasury Inflation Protected Securities and comparable U.S. notes, a measure known as the break-even rate that signals traders’ inflation outlook during the life of the debt, fell to 1.69 percentage points, the lowest level since Feb. 17.

The Fed’s favored gauge of inflation, the five-year, five-year forward break-even rate, projects as of March 10 that consumer prices will increase at a 1.90 percent rate starting in 2020. The Fed targets 2 percent inflation, reflecting a balance between assuring price stability and its mandate to support enough economic growth to achieve full employment.

Fed Watch

After the Fed’s March 17-18 meeting, investors will watch the central bank statement to see if it alters the wording to describe its policy stance.

By removing patient, “it doesn’t mean they have to move rates, but it means they have the option of doing that,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, a primary dealer. “The marketplace is fairly prepared for that.”

Futures trading shows a 53 percent chance for an increase to at least 0.5 percent by September, according to Bloomberg data. That’s down from 59 percent odds on March 6 when the Labor Department reported the U.S. added 295,000 jobs in February.

The U.S. is scheduled to sell $13 billion in 10-year inflation-indexed securities on March 19. It previously sold the securities on Jan. 22 at a yield of 0.315 percent, the lowest yield at an auction of the security since July.

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