Treasurys Little Changed as Investors Monitor Oil Prices

By Min Zeng Features Dow Jones Newswires

Prices of U.S. government debt were little changed Thursday with the yield on the benchmark 10-year Treasury note near its 2017 low.

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In recent trading, the yield on the benchmark 10-year Treasury note was 2.153%, according to Tradeweb, compared with 2.156% Wednesday. The yield's closing low in 2017 was 2.138% on June 14.

Yields fall as bond prices rise.

Investors are keeping an eye on crude oil futures, whose selloff this week has deflated inflation expectation and boosted the appeal of long-term government debt. Inflation chips away investors' purchasing power from their bond investments and is seen by investors as a big threat to the value of long-term Treasurys.

U.S. crude oil prices strengthened Thursday after settling Wednesday at the lowest level since Aug 2016 and bringing its loss this month to 12%. Some analysts are concerned that the oil market may resume its slide again, a case that could drive long-term Treasury yields down further.

A $5 billion sale of 30-year Treasury inflation-protected security is due at 1 p.m. Thursday. The value of TIPS will be adjusted higher when inflation readings are on the rise, making them a popular vehicle for investors for inflation protection. This asset class has been taking a beating lately due to softening consumer-price index reports in the U.S. and weaker energy prices.

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Some analysts say these factors may hurt demand for the TIPS auction. But some others believe that the recent selloff has turned TIPS into an attractive bargain. In a low yield world with many government bonds in Japan and the eurozone yielding below zero, the TIPS auction may attract investors looking for income, they say.

Treasury bond yields have fallen even as the Federal Reserve raised short-term interest rates last week for the second time this year and signaled another hike before the end of this year. Fed Chairwoman Janet Yellen said slowing inflation readings may be noisy and that a robust labor market may eventually push up inflation.

"The Fed keeps saying inflation is coming and the bond market continues to trade higher in price and lower in yield with almost the opposite viewpoint," said Kevin Giddis, head of fixed-income at Raymond James.

The yield on the 30-year Treasury bond was 2.72% recently, after closing at 2.724% Wednesday which was the lowest close since Nov. 8, 2016. The 30-year bond has been the best performer lately, which is typically the case when inflation expectations diminish.

The yield premium investors demanded to hold the 10-year Treasury note relative to the 10-year TIPS fell to 1.662 percentage point on Tuesday, the lowest level since last October.

The so-called 10-year break-even rate was 1.668 percentage point Thursday, signaling investors' expectations of an annualized 1.668% inflation rate on average within the next decade. The rate rose above the Fed's 2% target in January but has since pulled back.

Some Fed officials this week signaled that if inflation pressure continues to ease, the Fed may need to take a break on its rate increase campaign during the second half of this year.

Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, said in an interview with the Financial Times on Wednesday that he advocated policy makers "pause" on rates in the coming months while they started paring back the central bank's balance sheet that includes more than $2 trillion of Treasury bondholdings.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

June 22, 2017 11:19 ET (15:19 GMT)