Yields fall as concern over low inflation persists

U.S. Treasury yields fell on Tuesday as investors bet that low inflation is likely to persist, and that it may make the Federal Reserve less likely to increase interest rates until later this year.

Treasurys have gained since last week's Fed statement, when the U.S. central bank cut its inflation outlook and growth forecast. A majority of Wall Street's top banks now see the Fed holding off at least until September before raising interest rates for the first time since 2006.

Low inflation expectations persisted even after the Labor Department said on Tuesday that its Consumer Price Index increased 0.2 percent last month after falling 0.7 percent in January. That ended three straight months of declines in the index.

Thirty-year bonds outperformed, flattening the U.S. yield curve.

Benchmark 10-year note yields closed at 1.878 percent, the lowest since Feb 5.

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``The long-end of the curve has been outperforming with the general sentiment that there's not a lot of inflationary pressure out there to be concerned about,'' said Ian Lyngen, senior government bond strategist at CRT Capital in Stamford, Connecticut.

Low inflation expectations may have also helped demand for Tuesday's sale of $26 billion in a new two-year note supply.

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The Treasury will next sell $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday. It will also sell $13 billion in reopened two-year floating rate notes on Wednesday.

``I think the auctions will go well this week because the FOMC did such a complete twist to the marketplace last week,'' said Tom di Galoma, head of rates and credit trading at ED&F Man Capital Markets in New York.

``There's very little inflation in the system and will continue to be going forward,'' di Galoma added.

British data earlier on Tuesday showed inflation completely disappeared, hitting zero for the first time on record.