Treasuries Gain for Third Week on Outlook for Europe

Treasuries rose for a third week, the longest winning streak since November, amid concern Europe will struggle to contain its sovereign-debt crisis even as Cyprus’s banks reopened after two weeks of turmoil.

Benchmark 10-year note yields were little changed today after data showed the U.S. economy slowed less than previously estimated in the fourth quarter, while claims for jobless benefits rose last week. The yields fell earlier to a three-week low. The U.S. auctioned $29 billion of seven-year debt to lower- than-average demand.

“The Europe crisis is still full-blown, and at some point we’re are going to go to lower yields because of it,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade with the Federal Reserve and bid at U.S. debt offerings. “It’s just a matter of time before the next shoe drops in Europe.”

The 10-year yield declined six basis points this week, or 0.06 percentage point, to 1.85 percent at 2 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2 percent security due in February 2023 gained 18/32, or $5.63 per $1,000 face amount, to 101 11/32. The yield decreased today to 1.83 percent, the lowest level since March 4, before reversing the drop.

Yields on the current seven-year note lost seven basis points this week to 1.21 percent. They slid to 1.18 percent today, the lowest since Jan. 2, before erasing the decline and trading little changed.

The New York-based Securities Industry and Financial Markets Association recommended Treasuries trading end at 2 p.m. in advance of the Good Friday holiday and stay closed tomorrow.

‘Dance Around’

“We’ll dance around these levels, maybe up to 1.90 percent if Cyprus continues to calm down,” said Steven Ricchiuto, chief economist in New York at the primary dealer Mizuho Securities USA Inc. “We have an economy going nowhere quickly. The headwinds keep on changing.”

Treasuries have underperformed the Standard & Poor’s 500 Index this month as the Fed’s efforts to spur the economy boosted stocks. U.S. government bonds returned 0.2 percent in March through yesterday, Bank of America Merrill Lynch’s U.S. Treasury Index showed, versus a return by the equities index of 3.3 percent including reinvested dividends. Treasuries have lost 0.2 percent this year, after returning 2.2 percent in 2012.

U.S. government debt was less costly today after reaching the most expensive level in 2013 yesterday, a gauge showed. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was negative 0.73 percent after touching negative 0.78 percent yesterday. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Today’s Auction

The seven-year notes sold today drew a yield of 1.248 percent, compared with an average forecast of 1.243 percent in a Bloomberg News survey of six primary dealers. The record auction low yield was 0.954 percent in July, and yields reached 1.416 percent at the January sale, a 10-month high.

The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.56, matching the October sale’s figure, the lowest level since 2009. The average ratio at the past 10 sales was 2.68.

Indirect bidders, an investor class that includes foreign central banks, purchased 35.5 percent of the notes, compared with 33.4 percent in February and an average of 39.3 percent at the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 19.5 percent of the notes, compared with the 10-auction average of 16.3 percent.

Three Sales

The auction was the last of three Treasury note sales this week totaling $99 billion. The government sold $35 billion in five-year securities yesterday at a yield of 0.76 percent. The March 26 auction of $35 billion in two-year debt drew a yield of 0.255 percent.

The Fed bought $4.76 billion of Treasuries today due from March 2017 to November 2017. The central bank is purchasing $85 billion of Treasury and mortgage bonds a month to support the economy by putting downward pressure on borrowing costs.

Treasuries have gained 0.7 percent since the Cyprus turmoil took center stage about two weeks ago, Bank of America Merrill Lynch indexes show. German bonds returned 1 percent during the same period.

The Central Bank of Cyprus imposed new bank rules including a daily limit on withdrawals and restrictions on transfers to accounts outside the country.

EU Proposal

Cyprus’s lenders had been shut since March 16 when the European Union presented a proposal to force losses on depositors in exchange for a 10 billion-euro ($12.8 billion) bailout. That plan touched off protests and political upheaval, and was rejected by the country’s parliament. A subsequent agreement imposed larger losses on uninsured depositors.

“The market probably finds it hard to argue what is happening in Cyprus is a one-off event,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management Ltd. in London. “That should support safe-haven assets including U.S. Treasuries.”

Europe’s debt crisis began in Greece three years ago. Cyprus is the fifth euro-bloc member to seek international aid.

U.S. gross domestic product rose at a 0.4 percent annual rate in the fourth quarter, up from a 0.1 percent prior estimate and following a 3.1 percent pace in the third quarter, revised Commerce Department figures showed today in Washington.

First-time jobless claims rose by 16,000 to 357,000 in the week ended March 23, the highest level in more than a month, Labor Department data showed. A Bloomberg survey called for an increase to 340,000. The four-week average climbed from the lowest level in five years.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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