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Treasury Yields Reach 3-Week Low on Ukraine, Economic Outlook

Treasury 10-year note yields touched the lowest level in almost three weeks as political turmoil in Ukraine boosted demand for safety and investors weighed prospects for the U.S. economy.

Bonds remained higher as the government sold $29 billion in seven-year notes to the most demand in more than a year. Treasuries headed for the biggest two-month gain in almost two years, returning 2 percent in 2014, according to indexes compiled by Bloomberg. Federal Reserve Chair Janet Yellen told lawmakers it’s difficult to discern just how much the harsh weather this winter has affected the world’s biggest economy.

“There’s a flight-to-quality bid developing over the concerns about what’s going on in the Ukraine,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “There is concern the economy is going the wrong way, and it’s not necessarily weather-related.”

Ten-year yields fell three basis points, or 0.03 percentage point, to 2.64 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They reached 2.63 percent, the lowest since Feb. 7. The price of the benchmark 2.75 percent security due in February 2024 gained 7/32, or $2.19 per $1,000 face amount, to 100 31/32.

Current seven-year note yields declined two basis points to 2.08 percent and touched 2.07 percent, the lowest since Feb. 5.

The Bloomberg U.S. Treasury Bond Index, which was on track for a monthly decline until this week’s surge, has gained 0.2 percent in February.

Volatility Rises

Volatility in U.S. government securities as measured by the Bank of America Merrill Lynch MOVE Index rose for a second day, increasing 0.6 percent to 58.14. That compares with an average of 71.88 over the past 12 months.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, declined for the first time in three days. It fell 6.1 percent to $337 billion. This year’s average is $323 billion.

The auction of seven-year notes drew a yield of 2.105 percent, the lowest since October, compared with a forecast of 2.113 percent in a Bloomberg News poll of 10 of the Fed’s 22 primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.72, matching the level at the December 2012 offering of the securities. The average at the past 10 sales was 2.56.

Bidder Participation

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 24.6 percent of the notes at the sale, the most on record. That compared with an average of 19 percent at the past 10 sales.

Indirect bidders, a class of investor that includes foreign central banks, bought 41.1 percent of the notes, versus an average of 42.4 percent at the past 10 auctions.

“The auction was very strong, and came at the high of the day, with a record direct bid amid month-end needs,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., which as a primary dealer is obligated to bid in U.S. debt sales. “There seems to be a need for duration out there ahead of month-end.”

Fixed-income funds that manage portfolios against benchmark indexes typically purchase longer-maturity Treasuries at month-end to align their holdings’ interest-rate sensitivity with the indexes. Barclays Plc said via e-mail Feb. 25 its U.S. Aggregate Index (BUSY) will extend its duration, the measure of rate sensitivity, by 0.10 year on March 1, compared with 0.09 year on Feb. 1.

Four Auctions

Today’s offering was the final of four note auctions this week totaling $109 billion, including yesterday’s sale of $13 billion of two-year floating-rate securities at a high discount margin of 0.064 percent.

The government sold $35 billion of five-year notes yesterday to stronger-than-average demand. The bid-to-cover ratio was 2.98, compared with 2.59 times at the previous sale on Jan. 30. The Treasury auctioned $32 billion of fixed-rate two-year notes Feb. 25 at a yield of 0.34 percent.

Gunmen occupied parliament and the government building in Ukraine’s Crimea region as lawmakers in the capital approved a new cabinet after last week’s ouster of Viktor Yanukovych. Opposition leader Arseniy Yatsenyuk was backed as interim premier so he can begin loan talks to stave off default.

Russia began military exercises yesterday in its western central regions, saying they weren’t related to events in Ukraine. It put fighter jets on combat alert today as part of the drills, Interfax said, citing the Defense Ministry.

“That’s put a bid in the Treasury market,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co.

Yellen Testimony

Yellen, reiterating comments from a monetary-policy report she delivered two weeks ago to a House panel, told the Senate Banking Committee the Fed is likely to maintain its strategy of gradually trimming bond purchases even as it takes time for the job market to recover.

While Yellen said the purchases “are not on a preset course,” she added that if the economy progresses as anticipated they will probably end in the fall. Responding to a question, she said it would take a “significant” change in the outlook for the Fed to alter its strategy.

Yellen, who was sworn in as Fed chief on Feb. 3, said it’s difficult to tell exactly how much impact adverse weather is having on the economy. The central bank will try to “get a firmer handle” on the subject in the weeks ahead, she said.

The U.S. winter has been marked by waves of frigid air across the continent that combined with other systems to bring ice storms to Atlanta and snow to the Northeast.

Fed Purchases

The Fed said Dec. 18 it would trim its monthly bond-buying to $75 billion from $85 billion, and decided the following month to cut by another $10 billion. The purchases are designed to hold down long-term borrowing costs and spur economic growth.

Treasury yields pared declines earlier as Commerce Department data showed durable-goods orders decreased 1 percent last month following a revised 5.3 percent slump in December that was larger than previously estimated. The median estimate in a Bloomberg survey called for a 1.7 percent decline.

Orders improved for non-military capital goods excluding aircraft, a proxy for future business investment.

To contact the reporters on this story: Susanne Walker in New York at swalker33@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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