Treasuries Gain Most in 2 Weeks on Auctions Amid Russia Tension

Treasuries rose the most in almost two weeks as the cheapest five-year note auction in almost three years spurred demand for the securities amid rising tensions over Russia’s annexation of Crimea.

U.S. debt extended gains after President Barack Obama said Russia “miscalculated” and that sanctions could escalate. A drop in capital-goods orders earlier eased concern the Federal Reserve is moving closer to raising interest rates and bolstered investor demand at government-debt auctions. Citigroup Inc.’s capital plan was among five that failed central-bank stress tests.

“People are buying safety -- the worry is it will put Europe back into some form of recession,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. As for the auctions, “People were seeking higher yield levels, and they got them and put money to work.”

The benchmark 10-year note yield fell six basis points, or 0.06 percentage point, to 2.69 percent as of 5 p.m. in New York, the biggest drop since March 13, according to Bloomberg Bond Trader data. The price of the 2.75 percent note due in February 2024 rose 15/32, or $4.69 per $1,000 face value, to 100 1/2.

The five-year yield dropped six basis points to 1.67 percent, while the two-year debt yield rose two basis points to 0.44 percent.

The butterfly spread measuring five-year notes versus two-and 10-year securities, was at 21 basis points after closing at 29 basis points on March 24, the highest since April 2010.

Run ‘Roughshod’

Obama, speaking in Brussels, said Russia can’t run “roughshod” over its neighbors and its incursion into Ukraine must be met with condemnation. The president is in Europe to rally allies in opposition to Russia’s annexation of Crimea and troop buildup along the Ukrainian border, the most tense standoff involving the NATO alliance since the collapse of the Soviet Union.

Bookings for non-military capital goods excluding aircraft fell 1.3 percent in February after a 0.8 percent gain the previous month that was smaller than initially reported, data from the Commerce Department showed today in Washington. Demand for all durable goods -- items meant to last at least three years -- climbed a more-than-forecast 2.2 percent, reflecting the biggest gain in automobile demand in a year.

‘Slight Positive’

“Durable goods is a slight positive for bonds as it raises questions for the bullish-growth camp,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The cheapening up” of five-year notes reflects traders pulling forward expectations for higher Fed rates.

Fed Chair Janet Yellen said on March 19 the central bank’s debt-purchase program, which it uses to support the economy by putting downward pressure on interest rates, may end this fall.

The first interest-rate increase may come six months after that, she said. Fed board members cut monthly bond buying to $55 billion last week, from $85 billion in 2013.

The pace of tapering the central bank’s bond purchases will depend on the strength of the economic recovery, Fed Bank of St. Louis President James Bullard said today. While policy makers haven’t committed to a specific month to end bond purchases, it would take a significant shift in the economic outlook to alter its path.

“There’s a little bit of ambiguity around the notion of when the QE program ends,” whether in October, December or January, Bullard said in a Bloomberg Television interview in Hong Kong with Betty Liu, referring to quantitative easing. “Sometimes you see in the markets different interpretations of that, and frankly the committee has not really talked about that.”

Treasury Auctions

Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.

“It’s a slight concern,” said Charles Comiskey, head of Treasury trading at primary dealer Bank of Nova Scotia in New York. “If it were one of the ones that came through the crisis a little better, I think people would be more concerned.”

Regulators seeking to prevent a repeat of the 2008 financial crisis have run annual tests on how the largest banks would fare in a similar recession or economic shock.

The chance the central bank will increase its benchmark rate to 0.5 percent or higher by January was 17 percent, based on futures contracts. The odds were 10 percent a month ago.

Policy makers have held their target for federal funds, the rate banks charge each other on overnight loans, in a range of zero to 0.25 percent since 2008.

‘Best Value’

The five-year notes sold today yielded 1.715 percent, the highest since May 2011, compared with a forecast of 1.736 percent in a Bloomberg News survey of 10 of the Fed’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.99, the highest since September 2012, compared with the 2.6 times average at the past 10 auctions.

“It was a successful take-down of five-year supply,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It’s not a fundamental story. It’s the fact that rates backed up quite a ways, and that brought in a set of buyers.”

The U.S. also auctioned $13 billion of two-year floating-rate securities at a bid-to-cover ratio of 4.7 percent, the least since the Treasury started selling the debt in January. The auction drew a high discount margin of 0.069 percent, the highest in the three sales.

The Treasury sold $32 billion of two-year notes yesterday at 0.469 percent, the highest since May 2011. The bid-to-cover ratio was 3.2, the lowest since September at the monthly auctions.

The U.S. is scheduled to conclude this week’s offerings with a $29 billion seven-year sale tomorrow.

To contact the reporter on this story: Daniel Kruger in New York at

To contact the editors responsible for this story: Dave Liedtka at Kenneth Pringle, Greg Storey

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