Treasuries Fall for 3rd Day as Oil Rally Reduces Safety's Allure

  • Data show January manufacturing output, producer prices rise
  • Fed meeting minutes indicate officials saw increasing risks

Treasuries fell for a third day in the longest stretch of losses since December as a rebound in oil prices and equities diminished investor appetite for havens.

U.S. 10-year note yields rose after reports showed U.S. manufacturing output gained last month by the most since July while a gauge of producer prices unexpectedly increased. The Standard & Poor’s 500 index rose 1.7 percent as oil ended the day above $30 per barrel.

"It’s a risk-on trade," said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. The bond market “overreacted to all the negatives. We’ve retraced a good chunk of that.”

Yields have risen after slumping last week to the lowest since August 2012. U.S. government securities have gained 2.1 percent this year amid turmoil in global equity markets and tumbling oil prices, as plunging gauges of inflation expectations prompted traders to reduce bets on when and how often the Federal Reserve will raise interest rates this year.

The U.S. 10-year note yield rose five basis points, or 0.05 percentage point, to 1.82 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent security due in February 2026 fell 13/32, or $4.06 per $1,000 face amount, to 98 7/32.

Fed Outlook

Treasuries fell even as minutes of the Fed’s January meeting showed policy makers expressed concern that the fall in commodity prices and the rout in financial markets increasingly posed risks to the U.S. economy.

“Participants judged that the overall implications of these developments for the outlook for domestic economic activity was unclear but they agreed that uncertainty had increased,” according to minutes of the Federal Open Market Committee’s Jan. 26-27 meeting released Wednesday in Washington. “Many saw these developments as increasing the downside risks to the outlook.”

The Fed said in its Jan. 27 policy statement that inflation would rise to 2 percent over time as the “transitory effects” of cheaper energy and a stronger dollar fade, and as the labor market improves further.

"Since they met, the data have not been super-cooperative," said Aaron Kohli, a fixed-income strategist in New York for BMO Capital Markets, one of 22 primary dealers that trade with the Fed.

Futures traders see about a 41 percent chance the Fed will lift its target this year, down from a 93 percent probability assigned at the end of last year. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase.

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