Treasury Long Bond’s October Slide Is Near 4% on Inflation Signs

  • Consumer prices rise at fastest annual pace since 2014
  • Prospect of December interest-rate hike is hurting bonds

Global Inflation: ‘The Good, The Bad and The Ugly’

Treasury 30-year bonds have tumbled almost 4 percent in October, heading for their worst month in more than a year amid signs inflation is accelerating.

Long bonds are leading declines among government securities on speculation living costs are quickening enough to lead the Federal Reserve to raise interest rates this year. The U.S. consumer price index climbed 1.5 percent in September from a year ago, the biggest increase in almost two years, a Labor Department report showed Tuesday.

“Everybody is talking about the inflation rate,” said Kim Youngsung, head of overseas investment in Seoul at South Korea’s Government Employees Pension Service, which has $13.2 billion in assets. “We are expecting an interest-rate hike in December. Worldwide, everybody is worried about interest-rate hikes next year.”

The U.S. 30-year bond yield was little changed at 2.53 percent as of 8:44 a.m. in New York, according to Bloomberg Bond Trader data. It reached a four-month high of 2.59 percent Monday, after rising from as low as 2.09 percent in July. The price of the 2.25 percent security due in August 2046 was at 94 3/32.

The benchmark 10-year note yield fluctuated at 1.77 percent.

Bonds Sell-Off

Long bonds have lost 3.9 percent in October, set for their steepest decline since June 2015, according to Bank of America Corp. data. They suffer most when inflation picks up because of their longer maturities. The broader Treasury market has dropped 0.9 percent this month.

Bonds have fallen globally on speculation policy makers will have to get used to faster inflation, with Fed Chair Janet Yellen last week laying out arguments for keeping policy accommodative without taking a 2016 rate hike off the table. The Bloomberg Barclays Global Aggregate Index is down 2.2 percent in October, set for the steepest monthly decline in two years.

Futures pricing indicates a gradual pace of Fed rate increases, with traders seeing a 64 percent probability the central bank will tighten policy by December. The calculations assume that the effective fed funds rate will average 0.625 percent after the next increase. Swaps trading implies the rate will be 0.66 percent in a year, and 0.8 percent in two years, according to data compiled by Bloomberg.

“Everybody knows that if they go in December, they’re not suddenly going to get more aggressive with rate hikes,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “The Fed is looking at a trade-off: they’d accept a little-bit-higher inflation” which is “negative for the back end” of the yield curve, he said.

— With assistance by Marianna Duarte De Aragao

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