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By Bloomberg

Treasury yields show bond traders cut their outlook for inflation to the lowest in three years as oil prices fell and before employment data this week economists said will add to evidence income growth is weak.

Long-term Treasuries are surging and yields are tumbling this year as the outlook for low inflation fuels demand for bonds’ fixed interest payments. Speculation lower consumer prices will allow the Federal Reserve to delay raising interest rates is also stoking bond-market gains.

“Oil prices have held inflation low,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. “Low inflation is very important for the Fed. They could delay the interest-rate hike. Our expectation is for September 2015 but the risk is definitely that they move later. We don’t expect a big move to higher yields in the coming months.”

The benchmark U.S. 10-year yield was little changed at 2.23 percent at 6:32 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2024 was 100 6/32. The 10-year yield has fallen from 3.03 percent at the end of last year.

Treasury yields will rise to 2.30 percent in the short-term and 2.40 percent in the next three months, DZ Bank’s Figge said.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, dropped to 1.79 percentage points yesterday, the least since October 2011. It was at 1.81 percentage points today.

Bond Rally

Globally, bond investors anticipate consumer prices will rise an average 1.18 percent a year, based on yields of government debt for developed nations included in indexes compiled by Bank of America Corp.

The Bloomberg U.S. Treasury Bond Index of debt due in a decade and more has returned 21 percent this year through yesterday. The Standard & Poor’s 500 Index gained 13 percent including reinvested dividends in the same period. U.S. crude oil has fallen 31 percent.

“Oil is currently the reason why the 10-year yield is going down,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “It puts the inflation fear away from the bond market.”

U.S. average hourly earnings increased 2.1 percent in November from a year earlier, based on a Bloomberg News survey of economists before the Labor Department report Dec. 5. The figure has averaged 2 percent this year, unable to bounce back from the recession that began in December 2007 and ended in June 2009. It was as high as 3.6 percent in 2008.

U.S. employers added 230,000 jobs last month, compared with 214,000 in October, the report will show, based on analysts surveyed by Bloomberg.

Boost Spending

Treasuries fell yesterday after a gauge of manufacturing was higher than economists forecast and as Fed officials said the decline in oil prices will boost the economy.

The Institute for Supply Management’s factory index was little changed at 58.7 last month, compared with the median forecast in a Bloomberg survey of 58.

Fed Vice Chairman Stanley Fischer and New York Fed President William C. Dudley both said the drop in oil prices will stimulate consumer spending.

Investor expectations for a Fed rate increase in mid-2015 are reasonable and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance, Dudley said in a speech in New York.

Higher Yields

There’s enough growth in the U.S. that Kei Katayama, who trades the nation’s debt at Daiwa SB Investments Ltd. in Tokyo, said his company is “slightly underweight” Treasuries, meaning his fund holds fewer of the securities than contained in the benchmark it uses to track its performance.

“My view on the fundamental situation of the U.S. economy is still very solid,” he said. The company has the equivalent of $41.4 billion in assets.

Data today will show New York City area business conditions improved, national construction spending rose, while both total and domestic vehicle sales climbed, based on economists’ estimates in Bloomberg surveys.

Ten-year yields will rise to 2.85 percent by the end of 2015, according to a report yesterday by Matthew Hornbach and Paolo Batori at Morgan Stanley in New York. The company is one of the 22 primary dealers that underwrite the U.S. debt.

Treasuries are the government bonds to own for now, said Hans Goetti, the Singapore-based head of investment for Asia at Banque Internationale a Luxembourg SA.

A top-level AAA debt rank from two of the three major rating companies and a dollar rally that has pushed the currency to a seven-year high against the yen make U.S. government securities attractive, he said. Ten-year yields below 1 percent in Germany and Japan are another reason to invest in the U.S., Goetti said.