Treasuries Rise as Commodity Weakness Adds to Low-Rate Sentiment

  • Oil staying below $50/barrel further damps inflation outlook
  • Futures market signals no rate liftoff before March next year

Treasuries advanced as commodities fell amid concern that global growth and inflation will falter, strengthening an argument that the Federal Reserve won’t raise interest rates this year.

Longer-dated U.S. government bonds outperformed two-year notes as December oil futures traded in New York dropped as much as 3.1 percent after a report showed U.S. crude stockpiles grew by the most in six months. A market gauge of inflation expectations fell toward a six-year low, as futures traders predict the Federal Open Market Committee will hold rates until at least March. U.S. bonds advanced after German bunds gained.

"It’s been the same trade for the last week or so -- following oil, bunds -- there’s been nothing really to sink your teeth into," said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. "There’s just not a lot of conviction out there. It doesn’t seem like that’s going to change until the FOMC meeting next week."

The yield on the Treasury 10-year note dropped four basis points, or 0.04 percentage point, to 2.02 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 2 percent security maturing in August 2025 rose 3/8, or $3.75 per $1,000 face amount, to 99 25/32. The yield on two-year notes fell one basis point to 0.62 percent.

The Bloomberg Commodity Index dropped 0.7 percent to its lowest on a closing basis since Oct. 2.

Inflation Gauge

The 10-year break-even rate -- the gap between yields of fixed-rate and inflation-indexed Treasuries -- dropped three basis points to 1.45 percentage points, approaching the six-year low of 1.38 percentage points reached on Sept. 29. The rate was as high as 1.94 in June.

Futures show a 32 percent probability of Fed liftoff in 2015, according to data compiled by Bloomberg. That’s about half what it was before policy makers left their benchmark rate near zero on Sept. 17, citing tepid price pressures. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. The first meeting with a probability above 50 percent is March, at 55 percent.

"The commodity-price thing has clearly kept the Fed on hold longer than it should have," said David Keeble, head of U.S. rates strategy at Credit Agricole SA. "They seem to be ascribing a lot more weight to consumer prices than the unemployment rate right now."

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