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One industry's boom is proving to be the government's next meal ticket

By Daniel Kruger, Bloomberg

January 21, 2014 • Reprints

‘Treasury Exposure’

Real yields on the benchmark 10-year note climbed to within 0.1 percentage point of highest level in 34 months on Dec. 27, according to data compiled by Bloomberg. The greater the real yield, the more debt investors are insulated from a loss of purchasing power as the dollars needed to buy the same amount of goods and services increase.

The 10-year note yielded 1.34 percentage points more than the rate of inflation today, higher than the average of 1.07 percentage points in the past decade, data compiled by Bloomberg show. As recently as March, real yields were negative.

“That’s why we have Treasury exposure,” McIntyre said in a telephone interview from Philadelphia.

Treasuries, which posted just their fourth annual decline since 1978 as an improving U.S. economy strengthened the Fed’s case to taper its stimulus, are now off to the best start in five years. The $8.3 trillion of U.S. government debt from 1-year notes to 30-year bonds (CBOT:ZBH14) included in the Bank of America Merrill Lynch U.S. Treasury Index has returned 0.8% in January after losing 3.4% last year.

Energy Independence

Yields on the 10-year note were at 2.84% as of 9:27 a.m. New York time after falling for a third week to 2.82% in the five days through through Jan. 17. The price of the 2.75% bond due in November 2023 was 99 8/32.

Demand for fracking, a method used to fracture underground oil-and gas-bearing rock formations such as the Bakken shale in North Dakota and the Eagle Ford in Texas by injecting a mixture of water, sand and chemicals to create cracks and release the fuel, increased as rising oil prices in the past decade made it more affordable to explore on land than under water.

The U.S. is producing so much oil from fracking that the Energy Department estimates output will surge this year to the highest since 1986, helping to cap energy costs domestically.

Government restrictions on crude exports also mean increasing production helps insulate the world’s largest oil-consuming nation from price shocks stemming from fluctuations in foreign supplies.

‘More Reliable’

West Texas Intermediate crude (NYMEX:CLG14), the U.S. benchmark grade, will decline to $93 per barrel this year from $98.42 at the end of 2013, based on the Energy Department projection. As recently as July, analysts in a Bloomberg survey estimated that the price of oil would increase to $103 by the end of 2014.

Crude oil futures have already fallen 4.5% this year, with WTI futures ending at $94.37 per barrel last week. That’s $12.11 less than a barrel of Brent crude, the European benchmark grade. The WTI discount is currently three times as wide as the average of $4.02 over the past decade.

“The more that we produce, the more reliable our source is, and that’s certainly going to help keep a lid on prices,” James Sarni, senior managing partner at Payden & Rygel, which manages $85 billion, said by telephone from Los Angeles. “Inflation will be lower for longer than people think and whatever rate rise we do see will be less than people think.”

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About the Author

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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US Federal Reserve 8527oil 6597bank 6455Bloomberg 5254Oil 4707commodities 3439crude oil 3328Energies 2981financials 2975Economy 1513Texas 1372Organization of Petroleum-Exporting Countries 1337bonds 1125U.S. government 1118Department of Labor 1011Treasuries 1006Florida 876oil and gas 873U.S. Treasury 854WTI 731oil production 666Barclays Plc 573Department of Energy 546International Energy Agency 452Deutsche Bank AG 426Oil prices 398Inflation 395Bank of America Merrill Lynch 384Credit Suisse Group AG 308Notes 287North Dakota 254chemicals 239energy costs 224Yields 202Fracking 150foreign oil 93energy independence 89oil output 81oil embargo 72fuel oil 51energy crisis 38imported oil 36Crude oil futures 35Energy prices 24currency trader 20Ira Jersey 20Alan Ruskin 15oil-consuming nation 8energy expenses 5Jack McIntyre 5James Sarni 4Payden 3Brandywine Global Investment Management LLC 3Cumberland Advisors Inc. 3David Kotok 3pursued energy self-sufficiency 1underground oil-and gas-bearing rock formations 1

Free Newsletter Modern Trader Follow

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