Treasuries Advance as U.S. Inflation Remains Below Fed’s Target

Treasuries rose as inflation remains below the Federal Reserve’s 2 percent target, increasing speculation the central bank won’t rush to raise interest rates.

U.S. 30-year bond yields reached a six-week low as a report showed restrained inflation last month. The Fed’s stance outlined last week to shift policy based on economic developments bolstered demand Tuesday at the Treasury’s $26 billion sale of two-year notes. Primary dealers were left holding the smallest amount to distribute since 2012.

“There’s tremendous demand,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The Fed changing the goalposts of what their trigger is for moving rates only enhances that.”

The 30-year yield dropped five basis points, or 0.05 percentage point, to 2.47 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It reached the lowest level since Feb. 6.

The difference between yields on 10-year notes and equivalent inflation-indexed securities was at 1.77 percentage points, below the five-year average of 2.17 percentage points.

Inflation Update

The cost of living in the U.S. climbed 0.2 percent in February, as fuel costs stabilized. Prices were unchanged from a year earlier. On a year-over-year basis, core prices climbed 1.7 percent in February after rising 1.6 percent in the 12 months through January.

“It confirms the story of low inflation that’s pervasive within the U.S. and global economy,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets.

Officials opened the door last week to an interest-rate increase as soon as June, while also indicating in their forecasts they will go slow once they get started. The Fed wants to be “reasonably confident” inflation is rising toward its 2 percent goal before moving.

Fed Vice Chairman Stanley Fischer said Monday the central bank will make decisions on interest-rate moves based on economic developments, including progress in the pace of inflation.

Not Smooth

Fischer said “a smooth path upward in the federal funds rate will almost certainly not be realized” as the economy encounters shocks such as the surprise plunge in oil prices. “Whether it’s going to be June or September, or some later date, or some date in between, will depend on the data,” Fischer said.

At Tuesday’s two-year auction, primary dealers bought 36 percent of the notes.

Indirect bidders, a class of investors that includes foreign central banks, bought 45.7 percent of the securities. Direct bidders, which include fund managers who place their bids directly with the Treasury, bought 18.3 percent of the notes.

“U.S. twos are a very attractive front-end instrument, especially” because comparable yields are negative around the world, said Tyler Tucci, a U.S. government-bond strategist at Royal Bank of Scotland Plc’s RBS Securities unit in Stamford, Connecticut, one of 22 primary dealers that are obligated to bid at the auctions.

The Treasury will auction $35 billion of five-year securities as well as $13 billion in two-year floating-rate debt Wednesday and $29 billion of seven-year notes the following day.

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