Treasuries Extend Longest Slump Since 2006 as Traders Await Fed

  • No rate increase seen this week, but odds rising for 2016 move
  • U.S. 10-year yields climb to one-month high as oil gains

Treasury 30-year bonds fell for a seventh day, the longest string of losses since 2006, as the Federal Reserve kicked off a two-day meeting amid signs that U.S. inflation is accelerating.

Yields rose as crude oil’s latest advance pushed a bond-market gauge of inflation expectations to the most since August. The extra yield U.S. securities offer over their Japanese peers widened toward a 1 1/2-year high before the Fed announcement on Wednesday and a Bank of Japan policy decision a day later. 

Bonds have fallen as the price of crude oil has rallied 70 percent from a 12-year low set in February, fueling sentiment that inflation is moving toward the Fed’s 2 percent target. Higher inflation detracts from the appeal of fixed-income investments since it reduces the purchasing power of future cash flows. While futures suggest the Fed will keep its main interest rate unchanged at this meeting, traders boosted the probability of an increase in 2016 to 67 percent, from 55 percent a week ago.

“The Fed needs to describe to the market how hawkish they’re willing to be -- that’s what people are setting up for now,” said Aaron Kohli, a fixed-income strategist in New York for BMO Capital Markets, one of 23 primary dealers that trade with the Fed. “Some people are willing to bet the front end will feel some pain tomorrow, wagering that the Fed will try to bring the probability for a June hike higher.”

Kohli said he tells clients not to buy short-dated Treasuries ahead of an FOMC meeting, but that in the long run the securities are a good investment.

Rising Yields

Yields on U.S. 30-year bonds, which are more sensitive to expectations regarding inflation and economic growth, rose two basis points, or 0.02 percentage point, to 2.75 percent as of 5 p.m in New York, the highest since Feb. 1. The price of the 2.5 percent security due in February 2046 was 94 27/32. The yield has climbed 19 basis points since April 15.

Benchmark 10-year note yields rose one basis point to 1.93 percent, the highest since March 22. 

The yield on Treasury two-year notes, which are most sensitive to changes in Fed policy, rose three basis points to 0.86 percent. That yield has climbed even as the Citi Economic Surprise Index shows gauges of U.S. growth have trailed economist forecasts by a margin that’s widened since March. Data Tuesday showed durable-goods orders climbed less than forecast in March while a consumer-confidence index fell more than projected.

“The market’s trading the Fed’s rhetoric more than the data,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut, in an e-mail. “We trade what we see as the Fed’s bias -- they want to hike or at least want us to keep a hike priced in sometime down the road -- and then we mean-revert until we start to worry about the next meeting.”

In March, the Fed cited slowing global growth and a stronger dollar when scaling back the outlook for rate increases this year to two from four. Traders aren’t fully pricing in another increase until February.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of inflation expectations over the next decade, widened to 1.68 percentage points.

The U.S. Treasury sold $34 billion of five-year debt Tuesday at a yield of 1.41 percent, compared with 1.34 percent at the previous sale on March 29. It will sell $28 billion of seven-year notes April 28.

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