Treasuries Rise Second Week as Cyprus Crisis Fuels Haven Demand

Treasuries gained for a second straight week as investors sought safety on speculation financial turmoil in Cyprus would worsen Europe’s three-year-old sovereign-debt crisis.

Bonds slipped today amid signs Cyprus was moving closer to European Union-led bailout. Benchmark 10-year note yields traded below 2 percent for a sixth day even after a Cypriot official said there may be a deal in the next few hours and lawmakers passed legislation on capital controls.

“It’s all Cyprus,” Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Federal Reserve. “We’ve not had data that would support any rally. Data has been at the margin positive. What this is telling you is the market was pricing in very little risk premium for Europe.”

The 10-year yield declined six basis points this week, or 0.06 percentage point, to 1.93 percent, according to Bloomberg Bond Trader prices. It increased one basis point today at 5 p.m. in New York. The price of the 2 percent security due in February 2023 fell 1/8, or $1.25 per $1,000 face amount, to 100 21/32.

Thirty-year bond yields dropped six basis points this week to 3.15 percent. They rose two basis points today after falling as much two basis points.

Headline Trading

“The market is just trading on headlines, and right now we are settling in and waiting to see which way the wind blows,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There is anticipation something will happen shortly with Cyprus, but geopolitical risk is hard to handicap. So the Treasury market is going to stay relatively bid.”

The yield on the 10-year note fell below its 50-day moving average for a fifth 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.

The benchmark note yields still have risen 17 basis points since Dec. 31, poised for the first back-to-back quarterly increase in two years.

Hedge-fund managers and other large speculators decreased their net-short position in U.S. 10-year note futures in the week ending March 19, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 3,295 contracts on the Chicago Board of Trade. Net-short positions fell by 54,051 contracts, or 94 percent, from the week ended March 12, when traders reversed from a net-long position, the Washington-based commission’s Commitments of Traders report showed.

Treasuries Lose

U.S. government securities lost 0.5 percent this year through yesterday, after returning 2.2 percent in 20012, Bank of America Merrill Lynch indexes show. The Standard & Poor’s 500 Index gained 8.9 percent this year including reinvested dividends, after climbing 16 percent last year.

Treasury volatility as measured by the Bank of America Merrill Lynch MOVE index rose today to 61.9 basis points, the highest level since Feb. 6. The gauge, which tracks the outlook for swings in U.S. government debt rates, has averaged 65 basis points over the past year.

Trading volume fell for a third day, dropping 25 percent to $201 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It touched a one-week high of $354 billion on March 19. The average daily volume for the past year is $247 billion.

Cyprus Talks

European and Cypriot officials were locked in talks to find a way to avert the Mediterranean island’s financial collapse.

Lawmakers in Cyprus rejected this week a 5.8 billion-euro ($7.49 billion) levy on bank deposits imposed by euro-area finance ministers as a condition for a 10 billion-euro rescue. The European Central Bank said it will cut emergency funds to banks on the island after March 25 unless a bailout program with the EU and International Monetary Fund is in place.

Cyprus’s House of Representatives approved legislation late today to allow capital controls and to create a “solidarity” investment fund, part of efforts to secure assistance from the euro area and IMF. Legislators were debating seven other laws, including one on reorganization of the nation’s banks.

“We believe that in the next few hours we could be able, with a lot of difficulties, to reach a framework that will be within the policies of the EU, European Central Bank and IMF,” Averof Neofytou, deputy president of Cyprus’s ruling Disy party, told reporters in Nicosia, the capital.

Yield Outlook

Ten-year yields will trade at 2 percent at the end of June and increase to 2.31 percent by year-end, according to the weighted-average forecast in a Bloomberg survey of economists.

The Fed bought $3.68 billion of Treasuries today due from December 2018 to February 2020 as part of its efforts to bolster growth through lower borrowing costs. It’s purchasing $85 billion a month of Treasury and mortgage debt.

Reports due for release next week may show the U.S. economic recovery is gaining traction. Durable-goods orders rose in February, while gross domestic product expanded 0.5 percent in the fourth quarter, according to economists surveyed by Bloomberg News.

The Treasury said yesterday 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.

Before it's here, it's on the Bloomberg Terminal.