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.

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

“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.

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