U.S. 30-Year bond return tops 25% in 2014 gain

Treasury 30-year bond returns are topping 25 percent for the first year since 2011, driven by the outlook for low inflation, before the U.S. sells $13 billion of the securities today.

The debt has gained 27 percent, the most since a 36 percent advance during the European debt crisis three years ago, based on Bank of America Merrill Lynch indexes. Tumbling commodity prices and weakening global economic growth are helping keep costs in check and inflaming demand for fixed-income assets around the world. Data today and tomorrow are forecast by economists to show U.S. producer prices fell as retail sales and consumer confidence rose.

"While the U.S. economy is growing, there is a sense in the market that global growth remains sluggish and the inflation outlook is likely to stay benign," said Richard Kelly, a senior strategist at Toronto-Dominion Bank in London. "That explains why long-dated Treasuries are outperforming shorter-dated bonds and that trend will probably to continue in the near term."

Thirty-year yields dropped two basis points, or 0.02 percentage point, to 2.81 percent at 7:32 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 3 percent note due November 2044 rose 3/8, or $3.75 per $1,000 face amount, to 103 3/4. U.S. benchmark 10-year note yields fell two basis points to 2.15 percent, and touched 2.14 percent, the lowest since Oct. 21.

European bonds joined the rally in longer-maturity debt, with Germany's 30-year yield falling below 1.5 percent for the first time and Britain's dropping to a record 2.586 percent.

Too Costly?

This year's rally is raising concern Treasuries are becoming too costly.

At the last U.S. 30-year sale in November, investors bid for 2.29 times the amount of debt offered. It was the lowest level since May at the monthly auctions.

"As we look into 2015, Treasuries here probably are veering on the expensive side," said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. "We are looking for high yields over '15."

U.S. 10-year yields will rise to 3.11 percent by the end of next year, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings. The rate on 30-year bonds is forecast to rise to 3.80 percent.

The Federal Reserve will also increase its benchmark interest rate, the target for overnight loans between banks, next year, based on the responses.

Inflation Outlook

Long bonds are reaping the biggest gains as the outlook for inflation dims. Low costs help protect the value of a bond's fixed payments.

The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 1.7 percent this week. It was the lowest level in more than three years and compares to the average of 2.18 percent for the past decade.

Globally, bond investors anticipate consumer prices will rise an average 1.14 percent a year, the lowest since June 2013, based on yields of government debt for developed nations included in indexes compiled by Bank of America Corp.

The Bloomberg Commodity Index extended its decline to the lowest levels since 2009 this week.

U.S. retail sales rose 0.4 percent last month from October, according to a Bloomberg News survey of economists before the report today.

Producer prices fell in November and consumer confidence extended its advance to a seven-year high, reports tomorrow will show, based on responses from economists.