Treasuries climbed, with 10-year notes poised for a second weekly gain, as concern that Cyprus’s banking crisis will worsen the euro area’s sovereign-debt turmoil stoked demand for the refuge of U.S. government debt.
Bonds rose even after data showed the U.S. economy is improving. The U.S. sold 10-year inflation-linked notes at a negative yield for an eighth straight time amid skepticism that monetary stimulus by the Federal Reserve under Chairman Ben S. Bernanke won’t fuel inflation. Treasuries gained as the European Central Bank threatened to cut Cypriot banks off from funds unless the nation agrees on a bailout.
“Cyprus is a small country, but it’s big enough where it is a concern for the euro zone,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “You listen to Bernanke and nothing has changed, and now with the euro-zone situation outcome uncertain, investors have been unsettled enough to keep Treasuries well bid.”
The 10-year yield dropped five basis points, or 0.05 percentage point, to 1.91 percent at 5 p.m. in New York after climbing six basis points yesterday, the biggest increase since March 7. It has fallen eight basis points this week. The price of the 2 percent note due in February 2023 rose 13/32, or $4.06 per $1,000 face amount, to 100 25/32.
Benchmark 10-year yields fell below their 50-day moving average for a fourth straight day. Moving averages, which indicate momentum, are seen by some traders as potential turning points. The yield has traded on a closing basis this month within a 22 basis-point range, from 1.84 percent on March 1 to 2.06 percent on March 11.
Thirty-year bond yields dropped seven basis points to 3.13 percent after a seven basis-point jump yesterday.
Treasuries lost 0.6 percent this year through yesterday, poised for the biggest quarterly drop since the three months ended March 2012, a Bank of America Merrill Lynch index showed.
U.S. government securities due in a decade or more have been trading at almost the cheapest level since 2011 relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on the Treasuries reached 54 basis points higher than those in an index of other sovereign debt on March 14, near the most since August 2011, the data showed. The spread was 53 basis points yesterday.
Cyprus is seeking to overcome a deadlock after lawmakers rejected a 5.8 billion-euro ($7.5 billion) levy on bank deposits imposed by the European Union as a condition for a 10 billion-euro rescue. The ECB’s Governing Council decided to maintain its current level of Emergency Liquidity Assistance for Cyprus only until March 25, the central bank said in an e-mailed statement.
Standard & Poor’s cut Cyprus’s credit rating to CCC with a negative outlook, from CCC+. The nation’s parliament speaker said new banking-reform measures will be discussed tomorrow.
“The longer Cyprus is not dealt with, the more fear festers in the market about contagion, which continues to support Treasuries,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “You can’t fight the market right now.”
Treasuries briefly trimmed their advance after sales of previously owned U.S. homes rose 0.8 percent in February to a 4.98 million annualized rate, the most since November 2009, data from the National Association of Realtors showed today.
Labor Department figures showed applications for jobless benefits increased by 2,000 to 336,000 in the week ended March 16. Economists in a Bloomberg survey projected 340,000 claims. Manufacturing in the Philadelphia region unexpectedly expanded in March, the Philadelphia Fed’s general economic index showed.
Treasuries fell yesterday as the Fed reiterated its commitment to bond buying to spur economic growth, sustaining demand for higher-yielding assets. It said after a two-day meeting it would keep buying $85 billion of bonds each month to cap borrowing costs until “the outlook for the labor market has improved substantially in a context of price stability.” Inflation has been “relatively low,” Bernanke said.
The yield gap between 10-year Treasury Inflation Protected Securities and nominal U.S. notes, which signals traders’ outlook for consumer prices over the life of the debt, narrowed to 2.53 percentage points today, from 2.55 yesterday. While the figure, called the 10-year break-even rate, was less than a closing-basis high this year of 2.59 percentage points on March 14, it has averaged 2.36 percent over the past year.
The U.S. sold $13 billion today in 10-year TIPS, drawing a yield of negative 0.602 percent. The forecast in a Bloomberg survey of nine primary dealers was negative 0.603 percent. The auction’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.74, versus an average of 2.68 for the past 10 sales.
“The negative yield is a result of the Fed policy,” Aaron Kohli, an interest-rate strategist in New York at the primary dealer BNP Paribas SA, said before the sale. “It’s a sign, on a longer horizon, to get inflation protection because the Fed is still very accommodative.”
The Fed bought $1.46 billion of Treasuries today maturing from February 2036 to February 2043 under the stimulus program.
The Treasury said it will auction $99 billion of notes next week: $35 billion of two-year debt on March 26, the same amount of five-year securities the next day and $29 billion of seven-years on March 28.