US yields fall as oil collapse raises anxiety

NEW YORK: The collapsing oil market spurred a fresh wave of safe-haven bids for US government debt on Tuesday, sending the 30-year yield to its lowest in more two years as investors worried about how the plunge in crude prices might harm the global economy.

With US oil futures falling below $54 a barrel to 5-1/2 year lows, traders have been speculating whether the drop will force the US Federal Reserve to postpone a possible interest rate increase in 2015 despite encouraging domestic jobs and manufacturing data

The Federal Open Market Committee, the central bank's policy-setting group, will begin a two-day meeting later Tuesday. Many analysts expect the FOMC to drop its "considerable time" pledge on holding short-term rates near zero in its policy statement on Wednesday.

"We are focused on the negative right now. Oil weakness is driving it. There are worries about possible contagion effect," said Thomas Roth, executive director of US government trading at Mitsubishi UFJ Securities USA in New York.

Financial markets are grappling with the longer-term effects of the steep slide in oil prices.

Some analysts say lower energy costs will boost consumer spending by holding down prices on goods and services, but others argue this magnitude of price decline hurts domestic energy investments and the economies of Russia and other major oil exporters.

Russia's decision to raise interest rates by 6.5 percentage points to 17 percent, together with disappointing data in Europe and Asia, ignited another round of Treasuries buying on Tuesday.

Benchmark 10-year Treasury note yield fell to a two-month low of 2.009 percent before retracing to 2.061 percent, down 5 basis points from Monday.

The 30-year Treasury yield hit 2.670 percent, which was last seen in September 2012. It was last 2.706 percent, down nearly 4 basis points from Monday. This widened its spread with five-year yield to 1.20 percent from a six-year tight of 1.17 percent set on Monday.

Short-to-medium dated yields fell 5 to 7 basis points.

Treasury Inflation-Protected Securities' yield gaps versus regular Treasuries, which gauge investors' inflation expectations, contracted further. The five-year TIPS inflation break-even rate fell as low as 1.08 percent, which was the lowest since September 2010, Reuters data showed.

In the oil market, January US crude futures fell to $53.60 a barrel, a 5-1/2 year low before backing up to $54.74 which was still 2 percent lower on the day.