Treasuries Fall as Commodities Rebound Bolsters Economic Outlook

Treasuries fell as a rebound in oil prices supported bond-market inflation forecasts and Federal Reserve policy makers suggested U.S. economic strength merits raising interest rates soon.

Yields on Treasury 10-year notes advanced for the first time in three days as commodities and U.S. stocks rose amid speculation that price gains may accelerate. Fed Vice Chairman Stanley Fischer said in a Bloomberg Television interview that low inflation won’t persist with the U.S. near full employment. Atlanta Fed President Dennis Lockhart said the economy is strong enough to withstand a rise in borrowing costs even if economic data remain mixed.

“Longer-term yields have a pretty direct relationship with the price of oil,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “It’s a very important factor with respect to inflation.”

The benchmark Treasury 10-year note yield climbed six basis points, or 0.06 percentage point, to 2.23 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The 30-year bond yield rose eight basis points to 2.90 percent.

The Bloomberg Commodity Index jumped the most since February as oil advanced 2.5 percent in New York and copper rallied 2.6 percent.That helped support a gain in the bond market’s inflation forecast, known as the break-even rate.

‘Expecting September’

“I think the point of liftoff is close,” said Lockhart, a voting member of the central bank’s policy-setting committee, in remarks prepared for delivery in Atlanta. “I am not expecting the data signals to point uniformly in the same direction. I don’t need this.”

Traders are pricing in a 54 percent probability that the Fed raises rates at the September meeting, compared with 40 percent at the end of last month, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff.

“The majority of people now are expecting September,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “It’s not 100 percent discounted in the market. There will be also be positioning in Treasuries before the auctions.”

Auctions Ahead

The U.S. is set to auction $64 billion of coupon-bearing debt this week in three parts, beginning with a sale of three-year notes on Tuesday. The securities were last sold on July 7 with a yield of 0.932 percent.

Shorter-dated U.S. debt fell and longer-maturity bonds rose Aug. 7 after a report showed U.S. employers added more than 200,000 jobs for a third month in July. That narrowed the spread between yields on two- and 30-year securities -- known as the yield curve -- to 209 basis points, the flattest since April, indicating diminished expectations for longer-term growth and inflation.

“A large part of the current inflation is temporary,” Fischer said in an interview Monday with Tom Keene on Bloomberg Television. After the effects of cheaper oil and other raw materials dissipate, “these things will stabilize at some point, so we’re not going to be as low as we are forever.”

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