Vang SJC

The U.S. bond market shows the outlook for inflation is falling as crude oil prices tumble.

Federal Reserve Chair Janet Yellen may identify slow consumer-price gains as a hurdle to raising interest rates at a policy meeting Tuesday and Wednesday in Washington, after warning about declining costs at the previous session in January. Officials are debating how to raise their benchmark from close to zero after holding it there since 2008 to support the economy.

“They are still cautious about lower inflation,” said Hideo Shimomura, chief fund investor at Mitsubishi UFJ Asset Management, which oversees about $66 billion. “They would like to normalize policy, but in reality they will not raise rates this year. I’m bullish” on longer-term Treasuries, he said.

The benchmark 10-year yield was little changed at 2.06 percent at 6:45 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2025 was 99 14/32.

While the Fed will probably use its Wednesday statement to end its pledge to be “patient” about raising borrowing costs, policy makers will also refrain from boosting expectations on the economy, Shimomura said.

Most traders predict a rate increase by year-end. The odds of a boost by Dec. 31 are 76 percent, futures contracts show.

Inflation Outlook

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was 1.65 percentage points. It has fallen from 1.90 less than two weeks ago and has averaged 2.16 during the past decade.

Crude oil fell for a sixth day, extending a decline that has seen it slide more than 50 percent in the past year.

BlackRock Inc., the world’s biggest money manager with $4.65 trillion in assets, predicts the Fed may start increasing borrowing costs as early as June.

“The Fed has a historic window to start to actually move the rate higher,” Rick Rieder, chief investment officer of fundamental fixed income at New York-based BlackRock, said on Bloomberg Television last week. “The economy is moving ahead aggressively.”

The Fed’s preferred inflation gauge shows prices are nowhere near the central bank’s 2 percent target. The reading for January was 0.2 percent, the lowest level since 2009.

Source: Bloomberg

Linh Nhan