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Treasuries Decline Before Fed Decision as Cyprus Options Weighed

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March 20 (Bloomberg) -- Treasuries fell for the first time in four days before the Federal Reserve ends a policy meeting amid speculation the central bank will maintain its bond-buying program, underpinning demand for higher-yielding assets.

Ten-year yields rose from yesterday’s two-week low as Cyprus sought alternatives to a euro-area bailout plan and European officials weighed how far to push the nation. The European Central Bank said it would provide liquidity as needed within its rules, easing concern the region’s debt crisis will worsen. The Federal Open Market Committee will release economic forecasts today as it issues a statement.

“It’s been the week of Cyprus,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of the 21 primary dealers that trade with the Fed. “That’s the key driver, and going into the afternoon it will be the FOMC. There’s a little bit more confidence that something will be reached. Treasuries are getting hit a little bit.”

Benchmark 10-year yields rose four basis points, or 0.04 percentage point, to 1.94 percent at 1:11 p.m. in New York, according to Bloomberg Bond Trader prices. They climbed five basis points earlier. The 2 percent note maturing in February 2023 dropped 10/32, or $3.13 per $1,000 face amount, to 100 18/32. The yields slid yesterday to 1.89 percent, the lowest level since March 5.

Treasuries trimmed losses as two people familiar with the ECB’s deliberations said it probably will delay a decision on whether to continue to supply Cypriot banks with emergency funds as it awaits clarity on the nation’s rescue.

‘Reasonably Bearish’

“If this gets cleared up and there’s not contagion, then we’re reasonably bearish,” said Ira Jersey, an interest-rate strategist at the primary dealer Credit Suisse Group AG in New York. “I’m going to be watching the economic projections,” he said, referring to the Fed.

Treasuries lost 0.4 percent this year through yesterday, poised for the biggest quarterly decline since the three months ended March 2012, according to a Bank of America Merrill Lynch index. The Standard & Poor’s 500 Index of shares returned 9.1 percent, including reinvested dividends.

U.S. government securities dropped from the costliest level in two weeks. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at negative 0.69 percent, after touching negative 0.71 percent yesterday, the most expensive since March 5. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Fourth Quarter

Fed Chairman Ben S. Bernanke will probably start reducing the central bank’s $85 billion in monthly bond purchases no earlier than the fourth quarter of 2013, economists forecast in a Bloomberg survey.

The Fed will halt its unprecedented easing in the first half of next year after expanding central bank assets to a record of about $4 trillion, according to median estimates by 46 economists surveyed March 13-18 before the two-day meeting of policy makers ends today. Unemployment will have fallen to 7.3 percent from its current 7.7 percent when the Fed starts to pull back on its buying, the economists said.

Central-bank policy makers will release a statement and economic forecasts at about 2 p.m. today in Washington and Bernanke is scheduled to hold a press conference at 2:30 p.m.

“We won’t see an awful lot that will be new or different from the FOMC meeting except for the Fed’s projections on economic activity,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “They should acknowledge what has generally been a progression of economic data over the first quarter. But unemployment is still high.”

‘Substantial Improvement’

The Fed reiterated after its January meeting it will keep buying bonds to cap borrowing costs until there’s “substantial improvement” in the labor market. It said it will hold interest rates at almost zero as long as the unemployment rate is above 6.5 percent and inflation is projected to be no more than 2.5 percent.

Ten-year yields dropped one basis point to 1.99 percent following the previous Fed announcement on Jan. 30, when policy makers pledged to keep purchasing securities at the rate of $85 billion a month.

Bernanke will ultimately buy a total of $600 billion in mortgage bonds and $545 billion in Treasuries in the round of bond buying that began in September, according to the median projection in the March 13-18 survey.

Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s largest asset manager, said he sees faster growth in the world’s largest economy.

Growth Estimate

“If anything, we have migrated our view to a little higher” than the 2.5 percent-plus growth estimate, Fink said in a Bloomberg Television interview in Hong Kong. “If it wasn’t for Washington and the uncertainty that Washington has created, we’ll probably be navigating closer to 4 percent.”

Treasuries advanced yesterday after Cypriot lawmakers rejected an unprecedented levy on bank deposits, threatening to derail a bailout of the nation.

The ECB, whose Governing Council meets today in Frankfurt, will have to decide whether to give Cyprus more time or consider cutting off liquidity to the country’s banks. German Chancellor Angela Merkel, saying she “regrets” the Cypriot parliament’s decision, signaled a willingness to engage with Cyprus as long as its banks contribute to a bailout.

Cypriot Finance Minister Michael Sarris met in Moscow with his Russian counterpart and told reporters he’ll continue the talks “as long as it takes” as the island nation seeks to overcome the deadlock.

Russia, which granted Cyprus a 2.5 billion-euro ($3.2 billion) loan in December 2011, had been in talks on easing the terms before being left out of a European Union-led bailout that would see the levy imposed on depositors.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; 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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