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

‘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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