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Min Zeng
Updated May 9, 2016 3:24 p.m. ET

U.S. government bonds strengthened Monday, boosted by a broad price decline in commodities.

The prices of oil, copper, gold and silver all declined. Lower commodities are usually seen as reducing inflation risks, which makes government bonds more appealing for buyers. Inflation chips away bonds’ fixed return over time.

The yield on the benchmark 10-year Treasury note was 1.759%, compared with 1.779% Friday. Yields fall as bond prices rise.

The Treasury bond market regained some ground after last Friday’s price decline. Some buyers took advantage of the recent weakness to buy. Many money managers say they don’t expect a big rise in yields in a world of muddy global economic growth, still subdued inflation and a patient Federal Reserve in raising interest rates.

“Our view is that higher yields can’t be sustained here and so they present buying opportunities,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at the United Nations Federal Credit Union in New York. “It’ll be some time before inflation becomes threatening.”

A closely tracked gauge of inflation expectations in the bond market fell Monday. U.S. crude oil futures settled 2.7% lower Monday at $43.44 a barrel.

The 10-year break-even rate, or the yield spread between the 10-year Treasury note and its comparable Treasury inflation-protected note, slid to 1.592 percentage points, the lowest level since April 18. That suggested investors expect the U.S. inflation rate to run at an annualized 1.592% on average over the next 10 years. The break-even rate has been pulling back after hitting its 2016 peak of 1.72% in late April.

Looming new debt sales kept a lid on the bond market’s price gains.

The Treasury is scheduled to sell $24 billion in three-year notes on Tuesday, followed by a $23 billion sale of 10-year notes Wednesday and a $15 billion sale of 30-year bonds Thursday.

Short-term Treasury notes outperformed their longer-term peers on Monday. Traders say investors prefer securities that won’t bear the brunt of the new debt sales pressure. One popular trade to capture the supply dynamics is to buy the two-year notes and sell the 10-year and 30-year bonds, say traders.

The yield on the two-year note was 0.714%, down from 0.738% Friday. U.S. Treasury building in Washington D.C. Photo: John Greim/Getty Images

Analysts expect robust corporate debt supply in May as firms take advantage of still-very-low interest rates to lock in favorable funding costs. The 10-year Treasury yield traded less than 0.4 percentage point from its record closing low set in 2012. It was down more than half of a percentage point in 2016.

David Ader, head of government bond strategy at CRT Capital Group, said corporate debt sales could reach $40 billion to $50 billion this week. Traders say companies potentially selling new debt this month include Apple Inc., Dell Inc. and Merck & Co.

This corporate debt supply could weigh down Treasury bond prices this week. Firms planning debt sales typically sell Treasury debt to hedge against unwanted interest-rate volatility. In addition, money managers may lighten up their Treasury debt holdings and use the proceeds to buy new corporate bonds, which offer more attractive yields than comparable government debt.

Bond yields rose in April after their sharp decline during the first quarter as anxiety over the global growth dialed back. But yields have fallen again in May as some economic releases out of China, the U.S. and Europe have been disappointing. U.S. stocks’ march toward a record high has stalled. Crude oil prices have also pulled back from their 2016 peak set in late April.

Last Friday’s smaller-than-forecast non-farm jobs gain bolstered investors’ expectations that the Fed may hold off in raising rates again in June given the uncertain growth and inflation outlook. The prospect of a slowly moving Federal Reserve has reduced fears over a sharp increase in yields.

Write to Min Zeng at email@example.com





