U.S. Inflation Market Shrugs as Trump's Iran Stance Boosts Oil

(Bloomberg) -- U.S. inflation markets have shown a muted reaction after President Donald Trump’s decision to withdraw from the Iran nuclear deal boosted crude oil prices to the highest level in 3 1/2 years.

Traders’ reluctance to push up break-even rates -- a market-derived measure of inflation expectations -- was due in part to the recent strength of the dollar, according to John Davies, a U.S. interest-rate strategist at Standard Chartered Plc. While the cost of a barrel of West Texas Intermediate crude jumped, the 10-year break-even rate barely budged.

“Dollar strength over the last 24 hours is probably helping to offset the rise in oil prices in terms of the reaction of break-evens,” Davies said in emailed comments. “The Treasury market may need to see more like a five percent-plus increase in oil for break-evens to widen in any meaningful way.”

The U.S. 10-year break-even rate was little changed at 2.17 percent as of 11:09 a.m. in London. It touched 2.20 percent last month, its highest level since August 2014. The cost of WTI crude oil on the futures market climbed as much as 3.1 percent to $71.17 a barrel.

The yield on 10-year Treasuries rose above 3 percent as traders prepared for $25 billion of fresh supply due later Wednesday. Investor appetite for longer-maturity bonds has diminished, with money managers scouting for alternatives such as shorter-dated debt and global inflation-linked securities.

Trump said that the U.S. would withdraw from the landmark 2015 accord with Iran and reinstate financial sanctions on the country. The Bloomberg Dollar Spot Index, a trade-weighted measure, rose a fourth day to touch the highest level this year. The U.S. currency has been buoyed in recent months by the Federal Reserve’s aggressive pace of interest-rate increases relative to other central banks.

©2018 Bloomberg L.P.

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