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

America’s shale boom is providing an unintended benefit to U.S. government bonds.

With the U.S. economy relying less on oil and gas imports than at any time in two decades, energy expenses for Americans have fallen and cut into inflation more than any other living cost in the past year, according to data compiled by the Labor Department. Economists say consumer prices will rise less than 2% for a second straight year in 2014, the first time that’s happened during an expansion in a half-century.

Slowing inflation, which increases the purchasing power of fixed-rate payments, would give support to Treasuries after the Federal Reserve’s plan to curtail its unprecedented bond buying ignited their first annual losses since 2009. Ten-year notes (CBOT:ZNH14) yielded 1.76% last month after deducting inflation, close to the highest since 2011. Spending fewer dollars on foreign oil also means that any gain in crude prices (NYMEX:CLG14) no longer leads to a weaker greenback (NYBOT:DXH14), upending a decade-long relationship that may strengthen the value of U.S. assets.

Rising U.S. oil production means “lower inflation than it would otherwise be, lower interest rates than would otherwise be,” David Kotok, the chairman and chief investment officer of Sarasota, Florida-based Cumberland Advisors Inc., which manages $2.2 billion, said in a Jan. 16 telephone interview. “We don’t have to provide the incentives to recycle the dollar back from a foreign holder, be it friend or enemy” with higher bond yields.

Real Yields

Energy prices have become disinflationary in the U.S. as America comes closer to attaining energy independence, which has been bolstered by the proliferation of hydraulic fracturing, or fracking, of the nation’s shale deposits.

While a Labor Department report last week showed that fuel helped lift consumer prices 0.3% in December, the most in six months, energy expenses for all of 2013 still decreased.

The costs of gasoline and fuel oil, which account for about 10% of the U.S. consumer price index, fell 0.8% last year, the biggest drag on annual inflation of 1.48%. Oil prices will fall 5.5% in 2014, according to an annual forecast from the Energy Department, which will help limit the increase in living expenses to 1.7% this year.

The last time the cost of living in the U.S. rose less than 2% for two straight years during an expansion was in 1964 and 1965, Labor Department data show.

Smaller consumer-price gains are helping boost the appeal of Treasuries as inflation-adjusted yields rise, according to Jack McIntyre, a money manager at Brandywine Global Investment Management LLC, which oversees $45 billion.

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