KEY POINTS
- US Treasury bonds extended gains after recording their strongest monthly advance in more than two years.
- Yields on 10-year to 30-year debt fell by four to six basis points.
- A more than 7% drop in benchmark oil prices eased concerns about further Federal Reserve rate increases.
- Investors also turned to government bonds amid weakness in major technology stocks.
MAIN STORY
US Treasury bonds extended their rally on Monday as a sharp decline in oil prices eased inflation concerns and reduced expectations of further interest-rate increases by the Federal Reserve.
The gains followed the Treasury market’s strongest monthly advance in more than two years, with longer-dated securities leading the latest rise. Yields on bonds with maturities between 10 and 30 years fell by four to six basis points, reaching their lowest levels since September.
The benchmark 10-year Treasury yield dropped by as much as five basis points to below 4.88%, its lowest level since September 10.
The movement came as benchmark oil prices fell more than 7% on Monday amid hopes that renewed diplomatic talks could help end the Middle East war. West Texas Intermediate crude futures declined by as much as 7.5%.
Lower oil prices eased concerns that rising energy costs could intensify inflation and force the Federal Reserve to raise interest rates further.
Investors also increased their exposure to government bonds as weakness in major technology stocks encouraged demand for safer assets. The relationship between bonds and equities, which has historically seen government debt attract investors during stock market weakness, appeared to strengthen again over the past month.
Steven Zeng, an interest-rate strategist at Deutsche Bank, said the latest bond gains could reflect investors seeking protection against further declines in equities. He also linked the fall in oil prices to the downward movement in Treasury yields.
THE ISSUES
The Treasury rally reflects how developments in the energy market can influence expectations for US monetary policy.
Higher oil prices can increase inflationary pressure, potentially giving the Federal Reserve reason to maintain or raise interest rates. A sustained decline in oil prices could ease that pressure and reduce the need for further monetary tightening.
The Federal Reserve raised interest rates in September for the first time since 2023, following an acceleration in inflation linked to rising oil prices. Although traders still expect at least two additional quarter-point increases by the end of next year, the total amount of tightening priced into markets has declined over the past month.
However, the gains have not been uniform across the Treasury market. Shorter-term yields fell less than longer-term yields, partly reflecting the sharp steepening of the yield curve after the Fed’s decision last week to leave interest rates unchanged.
WHAT’S BEING SAID
“The historical negative correlation between bonds and equities seems to have returned over the past month, and the gains today could be related to investors looking to protect further downside in equities.” – Steven Zeng, interest-rate strategist at Deutsche Bank.
The oil price slide “also supports Treasury yields to move lower.” – Steven Zeng, interest-rate strategist at Deutsche Bank.
WHAT’S NEXT
Investors are also watching the US government’s quarterly discussion of its borrowing strategy scheduled for Wednesday.
The meeting could provide clarity on questions surrounding possible reductions in the supply of longer-dated Treasury securities, another factor influencing demand and yields at the longer end of the market.
BOTTOM LINE
Falling oil prices and demand for safer investments have strengthened the US Treasury market, while easing expectations of further Federal Reserve rate increases. The direction of oil prices, inflation and government borrowing will remain important to the outlook for US bond yields.
Source: Bloomberg
