Treasuries Soar as Commodities Plunge Damps Inflation Outlook

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Treasuries rose, with 30-year bond yields dropping to a seven-week low, as crude oil fell back into a bear market, damping the inflation outlook.

Long-term Treasuries outperformed shorter-term debt for the seventh straight day, the longest streak since early 2014 when the Federal Reserve was debating when to wind down its bond-buying program. Crude-oil futures dropped as resilient U.S. output, rising OPEC supply and threats to Chinese demand keep a global glut in place.

“Lower commodity prices are inherently disinflationary, which means lower yields,” said Edward Acton, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut.

Thirty-year bond yields dropped seven basis points, or 0.07 percentage point, to 2.97 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader prices. The yield reached the lowest level on a closing basis since June 1.

Crude oil futures fell 0.1 percent to $48.84 a barrel in New York. Prices have declined 21 percent during the past six weeks and reached the lowest level since March. The Bloomberg Commodity Index weakened 1 percent, reaching the lowest level since 2002.

Yield Curve

The difference between yields on U.S. two- and 30-year securities, known as the yield curve, fell to 2.27 percentage points. That is the least since May 28, and a seven-day drop in that measure is the longest since the eight days ended Jan. 13, 2014.

Fed Chair Janet Yellen said she expects to raise borrowing costs this year, with a gradual pace for subsequent increases, helping keep volatility low. Yellen told the Senate Banking Committee last week that her “own preference” was to tighten monetary policy “in a prudent and gradual manner,” while taking care “not to tighten too late.”

The central bank holds a policy meeting on July 28-29.

“The Fed has been repeatedly emphatic about the fact that they’re anticipating a liftoff this year” in rates, said Thomas Simons, a government-debt economist with Jefferies Group LLC, one of 22 primary dealers that trade with the Fed. “That would suggest there is going to be a really gradual path.”

Treasury one-year bill rates were trading at 0.32 percent, almost the highest levels since June 2010.

“Yields should have been higher for a while, when you think about the Fed prospects,” Simons said.