Treasury 30-Year Bonds Advance as Weak Inflation Overshadows Fed

  • Long bonds gain as oil falls for fifth day to six-year low
  • 30-year securities outperform short-term notes in past month

Treasury 30-year bonds advanced for the fourth time in five days as tumbling inflation expectations overshadow an anticipated Federal Reserve interest-rate increase next week.

Yields on 30-year bonds declined as oil prices fell for a fifth day to a six-year low. A bond-market gauge showed annual consumer-price increases over the next 10 years at 1.54 percent, the lowest on an intraday basis since Nov. 16. The U.S. is poised to sell $13 billion of 30-year securities Thursday.

"We really don’t have an issue on inflation," said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York. "That’s keeping a cap on rates."

Thirty-year yields fell one basis point, or 0.01 percentage point, to 2.96 percent as of 10:12 a.m. New York time, based on Bloomberg Bond Trader data. The price of the 3 percent bond due in November 2045 was 100 3/4.

Benchmark 10-year note yields were little changed at 2.22 percent, while the two-year note yield was at 0.93 percent.

Best Performers

Longer-term Treasuries held gains as a Labor Department report showed filings for U.S. unemployment benefits jumped last week to a five-month high.

The probability the Fed will increase its benchmark rate at its Dec. 15-16 meeting is 78 percent, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

Thirty-year Treasuries are the best-performing U.S. government bonds over the past month, returning 3.2 percent and outperforming every other maturity, based on data compiled by Bloomberg. Inflation holding near zero is driving demand for the securities, while shorter-term debt is lagging behind as investors prepare for the Fed. One-year Treasuries are the worst performers in the past month, with a 0.2 percent loss.

Additional Yield

“Shorter maturities are vulnerable due to expectations for a Fed rate hike,” said Hajime Nagata, a bond investor in Tokyo at Diam Co., which oversees $143 billion. “Long bonds are outperforming due to falling oil prices, indicating inflation pressures will be subdued.”

The additional yield investors demand to hold 30-year debt over two-year notes dropped to an eight-month low on Dec. 2. The spread narrowed to 196 basis points, the least since April 2, and was at 204 basis points Thursday. That curve flattening is being supported by an increasingly weak outlook for inflation, which remains below the Fed’s 2 percent target.

U.S. 30-year bonds yield 1.58 percentage points more than German equivalents, according to Bloomberg data, adding to the allure of Treasuries amid slow global growth.

At the last 30-year sale a month ago, investors bid for 2.41 times the amount of debt offered. The average for the past 10 sales including November’s is 2.33. The securities yielded 2.97 percent in pre-auction trading, compared with a yield of 3.07 percent at the previous sale.

The U.S. also auctioned $21 billion of 10-year notes Wednesday and $24 billion of three-year securities the day before.

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