Treasuries gain led by bonds as oil drop cuts inflation outlook

LONDON – Treasuries rose, pushing 30-year bond yields down for a second day, as plunging oil prices added to investor expectations that inflation will remain subdued while the U.S. economy strengthens.

The yield difference between 30-year bonds and similar- maturity Treasury Inflation Protected Securities this year has declined by the most in three years. West Texas Intermediate crude oil dropped to a three-year low after Saudi Arabia cut prices. Economists predict the Labor Department’s monthly employment report in three days will show earnings have yet to recover from the global financial crisis.

“Long-dated Treasuries are outperforming their short-dated counterparts,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Rising disinflationary pressures reinforced by the latest sharp fall in oil prices is a key support for longer-dated U.S. government bonds.”

U.S. 30-year yields, among the most sensitive to the outlook for inflation, declined three basis points, or 0.03 percentage point, to 3.03 percent at 8 a.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent bond due in August 2044 rose 17/32, or $5.31 per $1,000 face amount, to 101 23/32.

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Inflation expectations

The yield difference between 30-year bonds and similar- maturity TIPS, a gauge of expectations for consumer prices over the life of the securities, was 2.08 percentage points. The spread has shrunk 28 basis points in 2014, the most since 2011, and declined to 1.99 percentage points last month, the least in three years.

Benchmark 10-year yields dropped two basis point today to 2.32 percent. West Texas Intermediate crude slid 2.7 percent to $76.69 a barrel in New York and reached $75.84, the least since October 2011.

“Inflation will be subdued worldwide,” said Hajime Nagata, a money manager in Tokyo at Diam Co., which oversees the equivalent of $124 billion. “I prefer 30-year bonds.” Nagata said he’s also favoring long-term debt throughout the world’s biggest bond markets.

Average hourly earnings rose 2.1 percent in October from the year before, based on the Bloomberg News surveys, unable to bounce back following the recession that began in December 2007 and ended in June 2009. The figure has averaged 2 percent during the past four years, after being as high as 3.6 percent in 2008.

U.S. employers added 232,000 workers last month, down from 248,000 in September, according to the responses from economists.

Bond returns

Treasury 30-year bonds have returned 21 percent in 2014 through yesterday, compared with 0.8 percent for two-year notes, Bank of America Merrill Lynch indexes show.

The personal consumption expenditures price index has been below 2 percent for more than two years, resisting policy makers’ attempt to maintain a minimum level of inflation. The threat of falling prices can cause businesses to be reluctant to spend or invest.

Bob Doll, chief equity strategist at Nuveen Asset Management LLC in Chicago, said the combination of deflation concern and low bond yields have reinforced a sense that the global economy is troubled.

“We remain convinced that U.S. growth remains solid and that risks of deflation creeping into the United States are extremely low,” he wrote yesterday on the company’s website. Equities should produce better returns than other assets, Doll said.

Demand for long-maturity debt can be seen in the shrinking difference between U.S. five- and 30-year yields. The spread was 142 basis points today after contracting to 139 basis points on Sept. 29, the narrowest since January 2009.

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