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Bond yields fall as sliding oil prices hint at mild inflation

U.S. 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 Treasurys maturing within 7 to 30 years to their lowest since March 2. Longer-dated Treasurys 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.

``Ongoing weakness in crude oil in the last week is friendly to the long end of the market, just as the weaker data lately is,'' said Lou Brien, market strategist at DRW Trading in Chicago.

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.

Read MoreWhy the Fed meeting could create fireworks


Symbol
Yield
 
Change
%Change
US 3-MO
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US 1-YR
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US 2-YR
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US 5-YR
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US 10-YR
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US 30-YR
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While analysts said the Fed would still likely omit the word ``patient'' to describe its approach to the timing of rate increases from its upcoming policy statement, weak U.S. data could lead the central bank to suggest that a rate rise may not be imminent or that the pace of hikes will be gradual.

``The smart money is buying the long end under expectations of a gradual rate-hike trajectory,'' said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

The Fed began its 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 Treasurys. The benchmark S&P 500 stock index was down 0.4 percent.

Benchmark 10-year U.S. Treasury notes were last up 7/32 in price to yield 2.05 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 27/32 in price to yield 2.61 percent from 2.68 percent late Monday.