U.S. Government bonds strengthen on Brainard’s dovish comments, energy prices tumble

The US Treasuries saw continued upward pressure across much of the curve Tuesday as the probability of a September rate hike from the Federal Reserve has dropped to about 15 percent from previous 30 percent after Governor Lael Brainard maintained a dovish tone in her speech delivered yesterday.

The yield on the benchmark 10-year Treasury note fell 2 basis points to 1.653 percent, the yield on 5-year bond dipped more than 1 basis point to 1.190 percent and the yield on short-term 2-year note slid nearly 1 basis point to 0.766 percent by 11:00 GMT.

The Fed Governor Brainard (a voter in 2016) said the central bank should be careful in not removing accommodation too quickly, urging continued prudence before hiking. She further warranted for a stronger trend in consumer spending and evidence of stabilizing inflation before the central bank raises policy rates.

Although her speech was much anticipated (with a potential hawkish shift adding support for a September hike), her dovish tone is not particularly shocking, given her past commentary.

Moreover, the U.S. bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Federal Reserves target. Crude oil prices fell more than 1 percent after a number of rigs digging for oil in the US rose again last week. The International benchmark Brent futures fell 1.69 percent to $47.19 and West Texas Intermediate (WTI) dipped 1.68 percent to $45.11 by 10:30 GMT.

Lastly, markets now look ahead to a data light session on Tuesday, highlighted by the Treasury budget statement, followed by retail sales, producer prices, consumer prices, Philadelphia Fed and Empire manufacturing releases later in the week.

Meanwhile, the S&P 500 Futures traded 13 points lower at 2,139 by 11:10 GMT.