Treasury 10-Year Yield Reaches Lowest Since October on Oil Slump

  • U.S. auctions $24 billion of 3-year notes amid haven demand
  • Crude price drop to '03 levels damps inflation expectations

Treasuries surged, pushing 10-year yields to the lowest since October, as a slide in commodity prices damped the outlook for inflation and fueled concern that global economic growth will cool.

The yield on the 30-year bond, the maturity most sensitive to longer-term inflation expectations, declined to a one-month low as oil prices fell to the least since 2003. The U.S. sold $24 billion of three-year notes at the lowest yield at the monthly sales since October. U.S. stocks advanced for a second day, reversing earlier losses.

Haven demand has propelled Treasuries maturing in more than a year to a 1.1 percent gain in 2016, compared with 0.9 percent for all of 2015, amid speculation that market volatility emanating from China and plunging oil prices will further depress inflation. Federal Reserve officials favor continued tightening of U.S. monetary policy this year, forecasting four interest-rate increases in their latest projections, even as derivatives are pricing in fewer than two quarter-point increases in 2016.

"The continued risk-off sentiment is helping the rates market," said Shyam Rajan, head of U.S. rates strategy at Bank of America Corp. in New York, one of the 22 primary dealers that trade with the Fed. "The key drivers remain China and oil prices.”

The yield on the 10-year note fell seven basis points, or 0.07 percentage point, to 2.10 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data, the lowest on a closing basis since Oct. 28. The 2.25 percent security due November 2025 rose about 5/8, or $6.25 per $1,000 face amount, to 101 9/32. The yield has fallen 17 basis points this year.

Dwindling Cushion

The extra yield that 10-year securities offer over two-year notes dwindled to about 118 basis points, the least since 2012. Benchmark 30-year yields fell nine basis points, the most in a month, to 2.88 percent.

"There’s been this pervasive mentality that the global growth engine is impaired, and that’s showing up in crude oil, but it’s also affecting the long end of the curve," said Aaron Kohli, a fixed-income strategist in New York for BMO Capital Markets, a primary dealer. "That’s giving more strength to the rally."

A bond-market gauge known as the break-even rate shows investors expect a slowdown in the annual pace of price increases over the next decade. The difference between yields on 10-year notes and inflation-protected equivalents was at 1.46 percentage points, the lowest on a closing basis since October.

Auction Demand

Tuesday’s three-year note sale yielded 1.174 percent, the lowest since October. The bid-to-cover ratio, a gauge of demand, fell to 2.94 from 3.14 at last month’s sale.

Indirect bidders, a class of investors that includes foreign central banks and mutual funds, bought 62.8 percent of the notes, the highest since November 2009. Primary dealers took down 27.8 percent at the sale, the lowest since November 2009.

"It was an extremely strong auction," Rajan said. The sale was rated a "4" by five primary dealers, denoting a good offering, according to a Bloomberg News survey of the banks.

The U.S. will auction $21 billion of 10-year securities Wednesday and $13 billion in 30-year bonds the next day.

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