Long-dated U.S. Treasurys yields fell on Monday as oil prices dropped to five-year lows, denting inflation expectations and raising the appeal of long-maturity bonds over shorter-dated issues. An early rebound in oil prices faded after OPEC exporters said they would not cut production despite worries about a supply glut.
That renewed selling in stocks and buying in longer-dated Treasurys, analysts said. "We are again seeing a pullback in energy prices. That's weighed on stocks and put a bid back in Treasurys," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.
Concerns about weakening growth and inflation overseas, despite signs of a resilient U.S. economy, have also underpinned the appetite for longer-dated Treasurys, whose yields fell to two-month lows earlier on Monday.
Those worries have supported bets the Federal Reserve might consider keeping its pledge to leave short-term interest rates near zero for a "considerable period" in its latest policy statement at a two-day meeting beginning on Tuesday. However, most Wall Street economists forecast the Fed might raise rates in mid-2015 despite the oil market sell-off.
The yield on benchmark 10-year Treasury notes was 2.120 percent, up 1.5 basis points from late on Friday. It struck a two-month low at 2.071 percent in overnight trading. The 30-year Treasury yield fell 1 basis point to 2.745 percent after it briefly narrowed its premium over the five-year yield to a six-year low of 1.17 percent. Short-to-medium dated yields rose as much as 5 basis points.
Treasury Inflation-Protected Securities' yield gaps versus regular Treasurys, which gauge investors' inflation expectations, shrank to multi-year tights on Monday. The five-year TIPS inflation break-even rate fell nearly 4 basis points to 1.11 percent.
This was the lowest since September 2010, Reuters data showed. In the oil market, January U.S. crude futures on the New York Mercantile Exchange settled down 3.3 percent at $55.91 a barrel after hitting a five-year low at $55.18. The renewed slump in oil sent major U.S. stock indexes into negative territory again, after the Standard & Poor's 500 suffered its worst week in more than two years.
On the data front, the New York Federal Reserve's index of regional business activity fell to a two-year low in December, while a gauge on U.S. homebuilder sentiment dipped this month.
On the other hand, the government said industrial output rose 1.3 percent in November for the biggest monthly rise in more than 4-1/2 years.