By Daniel Kruger 

U.S. government bonds that offer investors protection against inflation rallied Monday, powered by concerns that a surge in oil prices would raise consumer prices after an attack on the heart of Saudi Arabia's oil industry.

The yield on 10-year Treasury inflation-protected securities, or TIPS, snapped a streak of five consecutive increases, falling to 0.173% from 0.227% Friday, according to Tradeweb. Bond yields fall when prices rise.

The yield on the benchmark 10-year Treasury note also fell, upending a five-session streak of increases, settling at 1.843%, from 1.901% Friday.

The gains halted a selloff that had driven the 10-year yield higher in five consecutive sessions to its biggest weekly advance in more than six years. Higher oil prices could add an additional strain on global growth, already stressed by the trade conflict between the U.S. and China.

Some investors said TIPS offered protection from the risk that a rise in the price of oil could lead to higher prices throughout the economy. TIPS tend to be sensitive to oil prices, which make up a large component of measures of inflation and investors tend to buy safe government bonds when they expect slower growth, which typically leads to slower price increases.

Some were already expecting higher inflation, with TIPS yields rising more moderately than yields on other debt last week after economic data showed that the U.S. economy remains on track to continue growing at a solid pace. Central banks around the world are also easing monetary policy to stimulate growth and inflation, with the Federal Reserve expected to cut rates at the conclusion of its meeting Wednesday.

Fed officials have become increasingly concerned that trade tensions and slowing growth around the world could spill over into the U.S. economy. The European Central Bank lowered interest rates and announced a new program of bond purchases last week.

"The Fed is trying to look past some of the backward-looking measures of inflation," said Scott Colyer, chief executive officer at Advisors Asset Management. While higher oil prices may raise short-term inflation concerns, "if this continues, it could hurt demand for goods and services," he said. "That's what the Fed is worried about."

Yet even with momentary price pressures in the economy, inflation has remained intractably low for a long time, demonstrating resistance to a variety of fiscal and monetary policies that investors had expected to revive it, some analysts said.

Inflation expectations in the bond market are measured by the gap between the yield on conventional fixed-rate government securities and the yield on similar maturity TIPS. The yield on TIPS maturing in 10 years was a recent 0.159%, making the gap between the two securities 1.675 percentage points. That's up from about 1.5 percentage points two weeks ago, according to Tradeweb.

The WSJ Dollar Index rose 0.3% to a recent 91.39, gaining against the euro and the British pound as yields on short-term Treasury bills rose.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

September 16, 2019 21:28 ET (01:28 GMT)

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