Treasuries Climb for a Third Day on Cyprus Concern as Fed Meets
Treasuries gained for a third day, pushing 10-year note yields to a two-week low, as investors sought refuge on concern that turmoil over bailout out Cyprus will worsen Europe’s sovereign-debt crisis.
The benchmark note’s yield dropped as the Federal Reserve started a two-day meeting amid speculation policy makers will decide to keep buying bonds to support economic growth. Treasuries climbed even after a report showed new U.S. home construction rose in February and building permits increased to the highest level in almost five years. Cyprus’s parliament voted down a levy on bank deposits that’s a bailout condition.
“The Cyprus issue is holding the market hostage and throwing the Fed a curveball, keeping Treasuries well bid,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage in Stamford, Connecticut, for institutional investors. “People are concerned that the issue could bleed to other countries in Europe.”
The 10-year yield dropped five basis points, or 0.05 percentage point, to 1.9 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.89 percent, the lowest level since March 5. The yield has closed between 1.9 percent and 2.06 percent since March 5. The price of the 2 percent note due February 2023 climbed 15/32, or $4.69 per $1,000 face amount, to 100 7/8.
Yields on 30-year bonds slid six basis points to 3.13 percent and touched 3.11 percent, the lowest since March 6.
Trading volume rose 33 percent to $352 billion, the most since March 8, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume for the past year is $247 billion.
“It’s strictly just a flight-to-quality bid,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of 21 primary dealers that trade with the U.S. central bank. “The Fed really has to mention the economy has improved somewhat. The real fear for this market is that they change their tune somewhat, and they could, because the data has changed.”
U.S. government securities were at the costliest level in almost two weeks. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at negative 0.71 percent, the most expensive since March 5. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Treasuries due in a decade or more have been trading at almost the cheapest level since 2011 relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on the Treasuries reached 54 basis points higher than those in an index of other sovereign debt on March 14, the most since August 2011, the data showed. The spread was 53 basis points yesterday.
Yields remained at almost their lows of the day after Cypriot lawmakers rejected the unprecedented tax on bank deposits, dealing a blow to European plans to force savers to shoulder part of a bailout of the country. Legislators in Nicosia, Cyprus’s capital, voted 36 against the proposal, with none in favor in a show of hands. There were 19 abstentions.
Hammered out by euro-area finance chiefs at the weekend, the deal had sought to raise 5.8 billion euros ($7.5 billion) by drawing funds from Cyprus bank accounts in return for 10 billion euros in international aid.
The European Central Bank said in a statement it “takes note of the decision of the Cypriot Parliament and is in contact with” the International Monetary Fund and the European Commission. “The ECB reaffirms its commitment to provide liquidity as needed within the existing rules,” it said.
The Federal Open Market Committee will issue a statement and economic forecasts tomorrow after ending its two-day policy meeting, and Fed Chairman Ben S. Bernanke will brief reporters.
Treasuries have lost 0.297 percent in March as the U.S. economy gained traction, halving February’s 0.594 percent return, a Bank of America Merrill Lynch index showed. Data this month showed the U.S. jobless rate dropped to 7.7 percent in February, the lowest level since December 2008, and retail sales rose 1.1 percent, the most in five months. Consumer prices rose 2 percent from February 2012, another report showed.
The Fed reiterated after its January meeting it will keep buying bonds until there’s “substantial improvement” in the labor market. It said it will hold interest rates at almost zero as long as the unemployment rate is above 6.5 percent and inflation is projected to be no more than 2.5 percent.
The central bank has kept its benchmark overnight target rate at zero to 0.25 percent since 2008. It’s purchasing $85 billion a month of bonds to cap borrowing costs, and bought $3.14 billion of Treasuries today due from May 2020 to February 2023 as part of the program.
“As long as inflation is low, the paramount concern is the unemployment rate,” Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York, wrote in a note to clients. “As long as inflation and inflation expectations remain contained, the FOMC could ease policy indefinitely. ”
Traders’ inflation expectations shrank for a third day. The yield gap between 10-year notes and Treasury Inflation Protected Securities, called the 10-year break-even rate, touched 2.53 percentage points, the least on an intraday basis since March 1. The gap, which was at a three-week high of 2.6 percentage points March 8, signals traders’ outlook for consumer prices over the life of the debt. It averaged 2.35 over the past year.
Builders broke ground on 917,000 homes at an annual rate, up 0.8 percent from a revised 910,000 pace in January that was higher than initially estimated, the Commerce Department reported today in Washington. Building permits, a proxy for future construction, advanced 4.6 percent to 946,000, the strongest since June 2008.
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