Treasuries Fall for a Third Day as Oil Rally Damps Haven Demand

  • Yields rise even as IMF cuts its forecast for global growth
  • U.S. sells three-year debt in first note auction this week

Treasuries declined for a third day, with benchmark 10-year notes headed for their longest run of losses in a month, as a rally in oil prices damped demand for the safest fixed-income assets.

U.S. debt fell along with its German and U.K. peers as crude prices climbed to a three-week high. Yields climbed even after the International Monetary Fund cut its world expansion forecast and warned of global stagnation. The U.S. sold $24 billion of three-year debt in the first of three note and bond auctions this week.

Oil’s rebound from a 12-year low in February has curbed investor appetite for Treasuries as the U.S. plans to sell $56 billion of coupon securities this week. Economic data in the coming days are forecast to show gauges of U.S. inflation rose in March. Futures contracts indicate traders assign about a 52 percent chance that the Federal Reserve will raise interest rates this year after liftoff from near zero in December.

"Higher oil reminds people of the potential risk of inflation," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "Momentum favors higher yields."

IMF Outlook

Treasury 10-year yields rose five basis points, or 0.05 percentage point, to 1.77 percent as of 1:17 p.m. New York time, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 fell 13/32, or $4.38 per $1,000 face amount, to 98 22/32. The yield climbed four basis points in the previous two days.

German 10-year bund yields added five basis points to 0.17 percent, while those on similar-maturity U.K. gilts increased five basis points to 1.44 percent.

The world economy will grow 3.2 percent this year, down from a projected 3.4 percent in January, the IMF said in a quarterly update to its World Economic Outlook. It also cut its 2016 U.S. growth forecast to 2.4 percent, from 2.6 percent.

"The market’s focus is going to be much more for the U.S. outlook -- which obviously ties into the global outlook to a significant degree," said Jeffrey Rosenberg, New York-based chief investment strategist for fixed income at BlackRock Inc., in an interview with Bloomberg Television. "You’re seeing a little bit of that negativity out of this IMF report."

Fed Caution

The April 2019 notes sold Tuesday yielded 0.89 percent. The U.S. will also auction $20 billion of 10-year debt Wednesday and $12 billion of 30-year bonds a day later.

Fed Bank of Philadelphia President Patrick Harker on Tuesday said policy makers should err on the side of caution when considering rate increases as persistently low inflation risks undermining the credibility of the central bank’s 2 percent goal.

The upper bound on the Fed’s target interest rate will rise to 1 percent by year end from the current 0.5 percent, according to the median forecast of economists in a Bloomberg survey.

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