Treasury market inflation outlook turns negative as oil falls
By Bloomberg
A Treasury market gauge measuring the outlook for inflation turned negative for the first time in five years as oil costs and consumer prices tumbled.
The difference between yields on two-year notes and similar-maturity Treasury Inflation Protected Securities, which measures expectations for consumer prices over the life of the debt, dropped to minus three basis points yesterday. Treasury long-term yields are falling as inflation slows, while shorter maturities lagged behind as the Federal Reserve prepares to raise interest rates, flattening the so-called yield curve.
“Worldwide inflation is going down,” said Yoshiyuki Suzuki, head of fixed-income at Fukoku Mutual Life Insurance Co. in Tokyo. “The yield curve will be much flatter” in 2015, he said. Fukoku oversees the equivalent of $52.7 billion.
The benchmark 10-year yield was little changed at 2.13 percent at 7:01 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.25 percent note maturing in November 2024 was 101 2/32.
The flattening yield curve shows up in the difference between five- and 30-year yields, which shrank to 111 basis points today, the least since January 2009.
Investors should maintain bets the trend will go further, Matthew Hornbach and Guneet Dhingra at Morgan Stanley wrote in a report yesterday.
Japan’s two-year yields declined to a record-low minus 0.02 percent, while those on its 10-year bonds were little changed at 0.35 percent. Australia’s 10-year yields climbed seven basis points to 2.85 percent.
Prices Decline
U.S. consumer prices fell 0.3 percent in November from October, a government report showed yesterday, the biggest decline since December 2008. Crude oil has tumbled 43 percent this year, set for the biggest decline since 2008.
Globally, bond investors anticipate consumer prices will rise an average pace of 1.06 percent a year, according to Bank of America Corp. data. The average for the past five years is 1.35 percent.
Treasuries fell yesterday after Fed Chair Janet Yellen indicated the central bank may boost borrowing costs next year.
Policy makers said they will be “patient” on the timing of the first rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time.”
Yellen said at a news conference a rate increase won’t take place for “at least the next couple of meetings.”
Treasury yields will climb in 2015 as improving economic growth leads the Fed to increase borrowing costs, said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney.
“It’s a combination of the macro fundamentals and shifting policy that we think is likely to see higher yields across the curve,” Ong said. Ten-year yields will rise to 3.4 percent at the end of next year, she said.
U.S. government securities returned 6.3 percent in 2014 through yesterday, the best performance since 2011, based on the Bloomberg U.S. Treasury Bond Index.