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Treasuries Decline a Second Day Before Fed Amid Crimea Sanctions

Treasury 10-year notes declined, after posting the biggest gain in two months last week, before the Federal Reserve begins a meeting that analysts said will see policy makers further scale back bond-purchase stimulus.

Benchmark yields rose a second day even as the U.S. and European Union hit Russian officials with sanctions over Crimea. The Fed is forecast on March 19 to cut monthly purchases under its quantitative-easing strategy to $55 billion while providing guidance on the outlook for interest-rate increases. A measure of general business conditions in the New York area rose as U.S. industrial production climbed the most in six months.

“With no war breaking out over the weekend, it seems the market is able to slow down on the flight-to-quality bid we saw,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “There doesn’t seem to be any reason why the Fed won’t continue the tapering process by another $10 billion.”

Benchmark 10-year yields rose four basis points, or 0.04 percentage point, to 2.69 percent at 5 p.m. New York time, Bloomberg Bond Trader data showed. The 2.75 percent note due February 2024 dropped 10/32, or $3.13 cents per $1,000 face amount, to 100 1/2.

Yields on the notes declined 13 basis points last week, the most since the period ended Jan. 10, while touching 2.61 percent on March 14, the lowest since March 4.

Fund Outflows

Treasury trading volume dropped 39 percent to $273 billion, the lowest level since Feb. 24, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume rose to $582.4 billion on March 13, the highest in more than nine months, according to ICAP.

Investors pulled $154.7 million out from exchange-traded funds of U.S. fixed income securities on March 14, reversing the 20-day average of $585 million in inflows, suggesting a diminished appetite for debt, according to ETF data compiled by Bloomberg.

Investors took $1.636 billion out of ETFs investing in U.S. stocks, compared with the 20-day average of $1.9 billion in inflows, Bloomberg data show.

Inflows into fixed-income are still out-pacing inflows into U.S. equities as U.S. fixed-income ETFs have taken in $8.9 billion so far this year, compared with $1.2 billion in outflows from domestic equity funds, Bloomberg data show.

Yield Forecasts

Economists and strategists in a Bloomberg News survey lowered their forecasts for how much the 10-year yield will increase at year-end. The rate will rise to 3.35 percent in the fourth quarter, according to a survey conducted March 7-12, down from 3.40 percent in a survey last month.

Hedge-fund managers and other large speculators increased their net-short positions in 10-year note futures in the week ending March 11, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets that prices will fall, outnumbered long positions by 118,210 contracts, the most since Feb. 11, on the Chicago Board of Trade.

The policy-setting Federal Open Market Committee will hold its first meeting led by Chair Janet Yellen, who succeeded Ben S. Bernanke last month, beginning tomorrow. The central bank in January reduced monthly bond purchases to $65 billion, citing labor-market indicators that “were mixed but on balance showed further improvement.”

‘Taper Down’

The Fed left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5 percent. The target rate has remained unchanged at zero to 0.25 percent since December 2008.

“They’re going to taper down to $55 billion -- the more important element will be forward rate guidance,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 22 primary dealers that trade with the Fed. “Manufacturing over the last few months showed points of weakness, mostly being attributable to weather. We’re starting to see signs of stabilization.”

The Fed Bank of New York’s Empire Manufacturing index climbed to 5.61 this month, from 4.48 in February. Readings of greater than zero signal expansion in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey of 55 economists called for a reading of 6.5.

The 0.8 percent gain at U.S. manufacturers followed a revised 0.9 percent slump in the prior month that was the biggest since May 2009, figures from the Fed showed. The median forecast called for a 0.3 percent advance. Total industrial production rose 0.6 percent, more than projected.

Crimea Tensions

President Barack Obama today imposed sanctions on seven top Russian government officials and added four others from Ukraine, including the former president, who the U.S. says threaten peace and security. The actions, which mark the broadest use of sanctions on Russia since the end of the Cold War, were made in concert with the 28-member European Union, which imposed its own set of penalties.

About 97 percent of the voters in the southern Ukraine region who took part backed joining Russia, preliminary results showed. The Ukrainian government, the EU and the U.S. consider the vote illegal, while Russia said it “fully met international norms.” The Kremlin has deployed about 60,000 troops along the Ukrainian border, the government in Kiev said.

“The market is trying to absorb the Ukraine situation,” said Charles Comiskey, New York-based head of Treasury trading at Bank of Nova Scotia, a primary dealer. “It’s given back some of the fear trade.”

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