Treasuries Advance as Oil Slide Curbs Inflation Expectations

  • Yields retreat from near 2017 highs before Fed meeting
  • Rally stalls temporarily after PPI rises more than forecast

Treasuries rose Tuesday as oil fell to the lowest since November, curbing inflation expectations even as the February Producer Price Index rose more than forecast.

Five- to 30-year yields were lower by two to four basis points at 3 p.m. in New York, with the 10-year yielding 2.59 percent. Monday’s close at 2.626 percent was the highest since September 2014, reached amid a surge in corporate bond issuance. There was no domestic credit issuance Tuesday as a snowstorm hit the U.S. east coast.

  • Flows included a 5k block sale in 10Y futures and a 17k block purchase in 5Y futures
  • WTI crude extended its slide to below $48 a barrel, from above $54 on March 1, after Saudi Arabia told OPEC it raised output in February; UST curve flattened as long end led yields lower, and TIPS breakevens narrowed as gasoline futures also traded at lowest levels since November
  • February PPI rose 0.3% vs 0.1% est., boosting y/y rate to 2.2%, highest since 2012; core PPI rose 0.3% vs 0.2% est.
  • While UST advance stalled briefly after PPI, February CPI on Wednesday “will undoubtedly be more telling for whether rates break in a bullish or bearish direction,” BMO strategist Aaron Kohli said in note
  • Wednesday also brings FOMC rate decision, with market-implied expectations for a hike approaching certainty; more critical for the direction of rates will be FOMC statement and any changes to member forecasts from December for fed funds rate over next 3 years
  • 5Y yields at highest levels since 2011 are “a consequence of heavy market wagering that the Fed will sound somewhat hawkish,” BMO strategists said in note
  • JPMorgan Treasury Client Survey found short positioning increased in week ended Monday
  • Technical strategists say USTs have major support at nearby yield levels, including 2.64% for the 10Y and 3.213% for the 30Y, last year’s highs; the 30Y touched 3.2131% during European trading amid a selloff in German bonds

— With assistance by Edward Bolingbroke

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