Janet Yellen’s emphasis on a gradual path to higher U.S. interest rates is being vindicated by a decline in the inflation outlook among traders.

The 10-year break-even rate, derived from the difference between nominal and index-linked bonds, fell to 1.83 percentage points Tuesday, the lowest close since June 1, as oil prices declined. The spread between two- and 30-year yields, which is also influenced by the inflation outlook, was at the narrowest in more than a month. Federal Reserve Chair Yellen told the Senate Banking Committee last week she prefers to “tighten in a prudent and gradual manner.” Subdued consumer-price gains lessen pressure to lift borrowing costs.

“Interest rates are likely to go up this year as signalled by the Fed, but low inflation means the pace would be gradual,” said John Stopford, London-based head of fixed income at Investec Asset Management Ltd., which oversees $120 billion. “We don’t expect yields to rise to levels seen in the previous cycle.”  Read More…