Treasuries Climb as Turmoil in Cyprus Overshadows U.S. Economy

Treasuries rose for a second week, paring a quarterly loss, as concern that Cyprus’s banking turmoil will worsen the euro area’s sovereign-debt crisis fueled demand for the refuge of U.S. government debt.

Bonds gained even as data signaled the U.S. economy is improving and the Federal Reserve said it would keep buying bonds to stoke further growth, encouraging demand for higher- yielding assets. Benchmark 10-year note yields traded below 2 percent throughout the week after Cyprus rejected a rescue that included an unprecedented levy on bank deposits. The Treasury will auction $99 billion of notes next week.

“Even though an array of economic data in the U.S. has been better than expected across a range of categories, yields remain low,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “The Fed reaffirming the continuation of easing and yet another new crisis out of Europe continue to keep the Treasury market supported.”

The 10-year yield fell six basis points, or 0.06 percentage point, to 1.93 percent this week in New York, according to Bloomberg Bond Trader prices. It reached 2.08 percent on March 8, the highest since April 5. The price of the 2 percent security maturing in February 2023 increased 18/32, or $5.63 per $1,000 face value, to 100 21/32 this week.

The yield on the benchmark note has traded on a closing basis this month in a 22 basis-point range, from 1.84 percent on March 1 to 2.06 percent on March 11.

Long Bonds

Thirty-year bond yields decreased six basis points to 3.15 percent. They climbed to an 11-month high of 3.28 percent on March 8.

Ten-year securities were headed for their second quarterly loss, the first such back-to-back decline since 2011, with yields up 16 basis points. Thirty-year yields have risen 20 basis points since the start of the year.

The Federal Open Market Committee said March 20 after a two-day policy meeting that it would keep purchasing $85 billion of bonds each month to cap borrowing costs until “the outlook for the labor market has improved substantially in a context of price stability.”

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

‘Remains Elevated’

Fed policy makers said in a statement that while the labor market showed improvement, the jobless rate, now 7.7 percent, “remains elevated.” They said the central bank’s monthly buying would continue and it would keep the benchmark interest rate at virtually zero as long as unemployment remains above 6.5 percent and inflation is projected at no more than 2.5 percent.

The U.S. auctioned $13 billion in 10-year Treasury Inflation Protected Securities on March 21, drawing a yield of negative 0.602 percent. It was the eighth consecutive time a sale of the inflation-indexed debt yielded less than zero.

“The negative yield is a result of the Fed policy,” Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, said before the sale. “It’s a sign, on a longer horizon, to get inflation protection because the Fed is still very accommodative.” As one of the Fed’s 21 primary dealers, the firm is obliged in bid in U.S. debt offerings.

The Treasury will sell $35 billion of conventional two-year notes on March 26, the same amount of five-year securities the next day and $29 billion of seven-year debt on March 28.

Gaining Strength

Housing, manufacturing and jobs reports in the U.S. this week showed the world’s biggest economy is gaining strength. Sales of previously owned U.S. homes rose 0.8 percent in February to a 4.98 million annualized rate, the most since November 2009, National Association of Realtors data showed.

Manufacturing in the Philadelphia region unexpectedly expanded in March, the Philadelphia Fed’s general economic index showed. Claims for jobless benefits rose by 2,000 to 336,000 last week, less than forecast, Labor Department data showed. The four-week average dropped to a five-year low of 339,750.

Treasuries climbed this week after lawmakers in Cyprus refused to accept a 5.8 billion-euro ($7.49 billion) levy on bank deposits imposed by euro-area finance ministers as a condition for a 10 billion-euro rescue. The European Central Bank said it would cut emergency funds to banks on the Mediterranean island after March 25 unless a bailout program with the EU and International Monetary Fund is in place.

‘Big Enough’

“Cyprus is a small country, but it’s big enough where it is a concern for the euro zone,” Sean Murphy, a trader at the primary dealer Societe Generale SA in New York, said March 21. “You listen to Bernanke and nothing has changed, and now with the euro-zone situation outcome uncertain, investors have been unsettled enough to keep Treasuries well bid.”

European and Cypriot officials were locked in talks yesterday to find a formula to avert the Mediterranean island’s financial collapse.

U.S. government securities lost 0.5 percent this year through March 21, after returning 2.2 percent in 2012, Bank of America Merrill Lynch indexes show. The Standard & Poor’s 500 Index gained 8.9 percent this year including reinvested dividends, after climbing 16 percent last year.

To contact the reporter on this story: 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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