Treasuries Rally as Commodity Plunge Damps Outlook for Inflation

Updated on

Treasuries rose for a third day, pushing longer-term yields to two-month lows, as plunging oil and a weaker-than-forecast manufacturing report fed speculation the Federal Reserve will delay a planned interest-rate increase.

Crude oil futures fell to their lowest level since March, while data from the Institute for Supply Management showed U.S. manufacturing output slowed last month. The gap between yields on Treasury five-year inflation-protected securities and equivalent nominal debt narrowed to the least since January.

“The ISM had some sway, and you’ve got oil down again,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It’s this whole global deflation-scare-trade coming back into vogue. Every number has an impact on the Fed right now given they may be fairly close to going.”

Signs of cooling inflation and economic growth sent the U.S. 10-year note yield down three basis points, or 0.03 percentage point, to 2.15 percent at about 5 p.m. New York time, according to Bloomberg Bond Trader data. The 2.125 percent security due in May 2025 climbed 9/32, or $2.81 per $1,000 face amount, to 99 25/32. The 30-year yield touched 2.84 percent, the lowest since May 29.

Fed Chair Janet Yellen said in July she expected the central bank to raise its benchmark rate this year, while emphasizing the pace of increases will probably be gradual.

Policy makers expect inflation to accelerate gradually toward their 2 percent target, the central bank said in a statement at its July 28-29 meeting.

Manufacturing Rises

An ISM gauge of U.S. manufacturing output fell to 52.7 last month from 53.5 in June. The gap between yields on Treasury five-year inflation-protected securities and equivalent nominal debt narrowed to 1.33 percentage points after plunging the most since January 14.

A separate report Monday showed the Fed’s preferred inflation gauge rose 0.3 percent in June from the same month last year, after a 0.2 percent increase in May. The index has been below the central bank’s 2 percent target for three years.

Officials have kept their benchmark interest rate, the target for overnight loans between banks, in a range of zero to 0.25 percent since December 2008.

There’s about a 38 percent chance the Fed will raise rates at its September meeting, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff. The likelihood of an increase at or before the December meeting is about 67 percent.

“The jobs number will be the most important of the week,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The input from Friday will be useful in skewing rate-hike expectations, but there’s a lot of data between now and the September meetings, so there will be different iterations of this.”