Treasuries Fall First Time in Four Days as Fed to Keep Buying

Treasuries dropped for the first time in four days as the Federal Reserve reiterated its commitment to asset purchases to spur economic growth, sustaining demand for higher-yielding assets.

The difference in yields between inflation-protected U.S. debt and 10-year notes increased to 2.55 percentage points as policy makers said the jobless rate remains “elevated” and the Fed will keep buying $85 billion of bonds a month. Yields rose earlier as Cyprus weighed options on how to secure a bailout package after rejecting a levy on bank deposits, lessening the refuge appeal of U.S. government debt.

“It’s steady as she goes,” said Richard Schlanger, a vice president at Pioneer Investments in Boston, who’s a member of a group managing $20 billion in fixed-income securities. “The Fed is concerned that there are deeply embedded problems, and that’s why they’re willing to continue to provide this accommodation.”

Ten-year note yields climbed six basis points, or 0.06 percentage point, to 1.96 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 1.89 percent yesterday, the lowest level since March 5. Yields have closed between 1.9 percent and 2.06 percent since March 5. The price of the 2 percent security due in February 2023 dropped 1/2, or $5 per $1,000 face amount, to 100 3/8.

Thirty-year bond yields increased seven basis points to 3.2 percent after falling yesterday to 3.11 percent.

Volume Drops

Trading volume fell 21 percent to $281 billion, its first drop in three days, 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.

“Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated,” the Federal Open Market Committee said today at the end a two- day meeting in Washington. Recent data suggest “a return to moderate economic growth following a pause late last year.”

Stocks rose, with the Standard & Poor’s 500 Index approaching a record high.

“The firming of the data has been reflected in the statement, but they are very clear that they haven’t reached their target and they will stay very accommodative,” said Jennifer Vail, head of fixed-income research in Minneapolis at U.S. Bank Wealth Management, which oversees $110 billion.

Fed officials forecast the jobless rate will hit their threshold for raising interest rates sometime in 2015, while projecting faster improvement in the labor market this year.

Fed Projections

They predicted the jobless rate will average 6.7 percent to 7 percent in the final quarter of 2014 and 6 percent to 6.5 percent in 2015, according to their central-tendency estimates. The economy will expand 2.3 percent to 2.8 percent this year, they estimated, compared with their earlier forecast of 2.3 percent to 3 percent growth.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, wrote on Twitter that “tapering of Fed purchases appears sooner than year-end although dependent on continuing strength of labor market indicators.”

The Fed left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.

“The Fed is going to remain on hold in terms of interest- rate hikes longer than we thought,” said Tom Graff, who manages $3.6 billion of fixed-income assets at Brown Advisory Inc. in Baltimore. “Yields in five- to seven-years will probably drop relative to the two-year note.”

Twos, Sevens

The difference between two- and seven-year Treasury yields was 1.07 percentage points today, down from 1.17 percentage points on March 11. Expectations for the Fed to hold borrowing costs near zero for a longer period would lead traders to narrow the gap, Graff said.

The Fed said its monthly bond purchases will remain divided between $40 billion of mortgage-backed securities and $45 billion of Treasuries. The purchases will continue until “the outlook for the labor market has improved substantially in a context of price stability,” it said.

The objective of the buying, under the quantitative-easing stimulus strategy, is to drive investors to higher-risk assets and avoid deflation.

Economists in a Bloomberg News survey forecast before the meeting that the Fed won’t slow the pace of its buying until at least the fourth quarter. The current round of purchases will total $1.15 trillion by the program’s conclusion, according to the median estimate in the poll of 46 economists.

Gained Traction

Treasuries have lost 0.1 percent in March as the U.S. economy gained traction, paring February’s 0.6 percent return, a Bank of America Merrill Lynch index showed.

Ten-year yields reached an 11-month high of 2.08 percent on March 8 after the Labor Department said U.S. employers added 236,000 jobs last month, beating a Bloomberg survey’s median forecast for a gain of 165,000. Payrolls have increased by an average of 205,000 jobs a month since November. The jobless rate was 7.7 percent last month, versus 10 percent in October 2009.

Consumer prices rose 2 percent last month from a year earlier, a separate government report showed last week.

The yield gap between 10-year Treasury Inflation Protected Securities and nominal U.S. notes, called the 10-year break-even rate, signals traders’ outlook for consumer prices over the life of the debt. It closed at 2.51 percentage points on Feb. 26 and averaged 2.36 percentage points over the past year.

Treasuries declined earlier as euro-area leaders and Cypriot officials considered alternatives after the Mediterranean nation rejected an unprecedented levy on bank deposits that’s a condition for a European Union-led bailout.

President Nicos Anastasiades of Cyprus met advisers in Nicosia to draft a new plan to stave off financial collapse.

Stocks gained amid speculation that the European Central Bank will continue to support Cyprus’s banks until next week, easing concern the turmoil will worsen Europe’s three-year-old sovereign-debt crisis.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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