Treasuries Drop on Quicker Price Growth, Rebound in Oil Prices

  • Third-quarter consumer prices revised higher than expected
  • Treasuries extend declines as oil prices stage rebound

Treasuries fell for the first time since the Federal Reserve raised interest rates Dec. 16 amid hints of strength in consumer and energy prices.

Yields climbed after the Commerce Department reported that consumer prices excluding food and fuel rose at a faster pace than previously estimated in the third quarter. That followed Monday comments from Federal Reserve Bank of Atlanta President Dennis Lockhart indicating the Fed could raise rates twice as fast as predicted by futures traders. Oil prices gained, helping alleviate the deflation concerns that have supported long-term U.S. debt prices.

"There’s been some move on the data; given all the concerns about low inflation, it’s a little encouraging" for the U.S. economy, said Gennadiy Goldberg, a U.S. interest-rates strategist for TD Securities LLC in New York.

The U.S. 10-year note yield rose four basis points, or 0.04 percentage point, to 2.24 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 fell 12/32, or $3.75 per $1,000 face amount, to about 100 1/8.

The moves came before an array of data Wednesday, including November consumer price growth and a survey of consumer inflation expectations. Signs of inflation may make the Fed more willing to raise interest rates, leading to steeper declines in Treasury prices. Trading was light before the Christmas holiday. The Securities Industry and Financial Markets Association recommends an early close for U.S. bond markets Thursday and a full closure on Friday.

“In normal times, if we weren’t around year-end, the market wouldn’t have moved,” Goldberg said, and the light trading has caused “a lot of volatility.”

Fed Outlook

Few traders are betting on runaway price growth, going by break-even inflation rates, or the difference between yields on inflation-linked securities and nominal equivalents. Those gauges indicate that traders expect consumer prices to rise 1.19 percent annually over the next five years. Break-even rates have dropped alongside oil prices in recent months.

Futures traders are betting the Fed will raise interest rates twice next year, according to data compiled by Bloomberg. They’re assigning a 54 percent chance the next rate increase will happen by April, and a 70 percent chance it will happen by June, based on the assumption that the effective fed funds rate will trade at the middle of the new Fed target range after the next hike.

That’s half the pace of the timeline laid out by Fed President Lockhart on Monday, as well as the median projection in the central bank’s dot plot of Fed officials’ estimates for rates.

"People are still trying to feel out exactly what the impact of the rate hike is, and how many more are coming next year," Goldberg said.

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