Treasuries rose, with two-year notes climbing the most since September, as concern of spreading unrest in the Middle East boosted demand for the relative safety of U.S. government debt.
Ten-year note yields fell as Egypt approved a request from Iran to send two naval ships through the Suez Canal on their way to Syria, which ratcheted up regional tensions and drove oil prices higher as Israel called it a “provocation.” The Federal Reserve purchased $24 billion of Treasuries and TIPS during the week, as part of its efforts to sustain the economic expansion. The Treasury will sell $99 billion of notes next week.
“Geopolitical risk remains and there is a lot of uncertainty about the possibility of it spreading, which has given Treasuries a bid,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas, one of the 20 primary dealers required to bid at Treasury auctions. “With Fed purchases continuing and global unrest, Treasuries have support.”
Two-year note yields fell nine basis points to 0.75 percent in New York, according to BGCantor Data, the most since the week ending on Sept. 17, from 0.84 percent on Feb. 11. The price of the 0.625 percent securities maturing in January 2013 was 99 24/32. Ten-year note yields dropped five basis points to 3.58 percent from 3.63 percent.
Flight to Bills
Three-month bill rates traded as low as 0.0821 percent yesterday, the least since June 17. One-month bill rates were little changed at 0.0659 percent.
“Anytime there is civil unrest anywhere people will flock to Treasury bills,” said Michael Franzese, head of Treasury trading at Wunderlich Securities Inc. in New York. “Investors feel they can wait out in bills the uncertainty with regard to what is going on with Federal Reserve monetary policy and the direction of long-term Treasury yields.”
Treasuries pared a weekly gain yesterday after a European Central Bank official said it may need to raise interest rates as global inflation pressures mount while the Fed maintains its target of almost-zero short-term rates. ECB Executive Board member Lorenzo Bini Smaghi said the “degree of accommodation of monetary policy has to be monitored and, if needed, corrected,” in an interview with the daily newsletter Bloomberg Brief: Economics.
Fed Chairman Ben S. Bernanke’s speech text in Paris yesterday didn’t address the U.S. monetary policy that central bank policy makers maintained last month along with plans to buy $600 billion of Treasuries through June. Paris is hosting the Group of 20 meetings of central bankers and finance ministers this weekend.
Minutes of the Fed’s meeting last month showed policy makers regarded the U.S. recovery as being on a “firmer footing.” The central bank raised projections for economic growth this year and made little change to forecasts after 2011 or for unemployment and inflation. They were divided about whether further evidence of a strengthening recovery would warrant slowing or reducing the Treasuries buying.
“People were expecting the minutes to mention some sort of exit plan, but the Fed signaled that they are more concerned about growth, which lets the market know that they are inclined to stay accommodative,” BNP Paribas’s Prakash said.
The difference between yields on two-year notes and Treasury Inflation Protected Securities, which tracks the outlook for consumer prices during the life of the debt, expanded to 2.04 percentage points, the widest gap since July 2008.
Government economic reports showed housing starts climbed 15 percent in January to a 596,000 annual rate and the consumer price index increased 0.4 percent in January, exceeding the 0.3 percent median estimate of economists surveyed by Bloomberg News, figures from the Labor Department showed. Year-on-year inflation accelerated to 1.6 percent, the highest since May.
“The fundamentals look good, and are bearish for Treasuries, but the market can’t ignore geopolitical risk like this,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, a primary dealer.
President Barack Obama sent Congress a $3.7 trillion budget that projects the federal deficit will exceed $1 trillion for the fourth consecutive year in 2012 before falling to more “sustainable” levels by the middle of the decade.
The deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product -- up from the $1.4 trillion the administration estimated previously. It would be $1.1 trillion in 2012, 7 percent of GDP. By 2015 it would decline to $607 billion, or 3.2 percent of GDP.
The U.S. plans to sell $35 billion in two-year notes on Feb. 22, the same amount of five-year debt the following day and $29 billion in seven-year securities on Feb. 24.
Treasuries have handed investors a 1 percent loss in 2011, while inflation-linked Treasuries decreased 0.8 percent, according to indexes compiled by Bank of America Merrill Lynch.
“No one wants to be short going into a long weekend that could expose the market to a lot of event risk,” said Thomas Tucci, managing director and head of rates trading at Royal Bank of Canada in New York. “Any selloff will be limited given the potential for more geopolitical headlines.”