Bond yields fall as sliding oil prices hint at mild inflation

NEW YORK: US intermediate- and long-dated Treasury yields hit their lowest in over two weeks on Tuesday after further declines in oil prices underscored mild inflation, while weak U.S. economic data pointed to a more dovish Federal Reserve.

The weakness in oil prices helped push yields on Treasuries maturing within 7 to 30 years to their lowest since March 2. Longer-dated Treasuries benefit from signs of mild inflation, since inflation erodes the value of interest payouts.

Brent crude slipped for a fourth straight session, falling below $53 a barrel in choppy trade, hovering near a 1-1/2-month low hit Monday.

"This drop in oil prices is driving the drop in yields," said David Coard, head of fixed-income sales and trading at Williams Capital in New York.

Data showing U.S. housing starts tumbled 17 percent to their lowest in a year in February was the latest indication the economy hit a soft patch in the first quarter.

While analysts said the Fed would still likely omit the word "patient" to describe the timing of rate increases from its upcoming policy statement, weak U.S. data could lead the central bank to emphasize that a rate hike may not be imminent.

"The Fed will still likely remove the word 'patient,' but may stress that they'll continue to take data into account, which could decrease the probability of a June hike," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. The Fed begins a two-day policy meeting on Tuesday.

Analysts said low trading volume, a result of investor caution ahead of the closely watched Fed meeting, likely exaggerated price movements in the Treasury market. Just 431,656 10-year T-note futures contracts changed hands in morning U.S. trading, on track for the lowest daily volume since late December.

Analysts also said weakness in U.S. stocks stoked demand for safe-haven Treasuries. The benchmark S&P 500 stock index was down 0.4 percent.

Benchmark 10-year U.S. Treasury notes were last up 9/32 in price to yield 2.06 percent from 2.1 percent late on Monday. The yield hit a session low of 2.04 percent.

U.S. 30-year Treasury bonds were last up 28/32 in price to yield 2.63 percent from 2.68 percent late Monday and near a session low yield of 2.61 percent.