U.S. Yield Holds Two-Week Low as Lagarde Warns While Fed Meets

U.S. 10-year yields held near a two-week low, as a drop in oil prices damped the outlook for inflation with the Federal Reserve meeting to discuss the timing of an interest-rate increase.

A gauge of bond-market expectations for consumer prices during the next decade dropped Tuesday for a ninth day, its longest run of losses since 2008, as crude approached a six-year low. Fed Chair Janet Yellen may reiterate a warning about declining costs at the policy meeting that ends Wednesday in Washington. IMF Managing Director Christine Lagarde said volatility may increase if the Fed surprises investors.

“Markets are now eagerly awaiting the FOMC meeting and the consequences of a change in language from the Fed,” Martin Whetton and Savita Singh, analysts at Australia & New Zealand Banking Group Ltd., wrote Wednesday in a note to clients. “Previously we have seen the market disappointed by expectations of a hawkish Fed.”

The 10-year yield was 2.05 percent at 9:47 a.m. in Tokyo, according to Bloomberg Bond Trader data. It reached 2.04 percent on Tuesday in New York, the lowest since March 2.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, known as the break-even rate, fell to 1.62 percentage points, the lowest since Jan. 30. It has dropped from 1.90 points two weeks ago and has averaged 2.16 points in the past decade.

“That’s one of the reasons rates are staying as low as they are, because there isn’t any inflation in the system,” said Thomas di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “The perception is that oil will be going lower over the course of the summer.”

Crude oil futures are falling for a seventh day, down 1.8 percent to $42.68 a barrel.

Lagarde Comments

“We are perhaps approaching the point where, for the first time since 2006, the United States will raise short term interest rates later this year,” Lagarde said in Mumbai on Tuesday. “Even if this process is well managed, the likely volatility in financial markets could give rise to potential stability risks.”

The International Monetary Fund’s head was sharing the stage with Reserve Bank of India Governor Raghuram Rajan, who has repeatedly called for more coordination among central banks to shield vulnerable markets from capital swings. The rupee was among currencies that plunged to a record when the Fed first signaled a reduction in stimulus in May-June 2013, pushing India to the brink of a crisis.

Most traders predict a rate increase by year-end. The odds of a boost by September are 55 percent, futures contracts show.

Fed Patience

Fed officials are debating when to raise their benchmark from close to zero after holding it there since 2008 to support the economy. The central bank may use its Wednesday statement to end or alter its pledge to be “patient” about raising borrowing costs.

Policy makers will refrain from boosting expectations on the economy, according to Hideo Shimomura, chief fund investor at Mitsubishi UFJ Asset Management, which oversees about $66 billion.

“They are still cautious about lower inflation,” Shimomura said Tuesday. “They would like to normalize policy, but in reality they will not raise rates this year. I’m bullish” on longer-term Treasuries, he said.

The Fed’s preferred inflation gauge shows prices are far from the central bank’s 2 percent target. The reading for January was 0.2 percent, the lowest level since 2009.

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