Treasuries Pare Losses as Ukraine Unrest Fuels Refuge Demand

Treasuries pared losses amid political tension in Ukraine as traders sought a refuge in the world’s largest securities market with trading drawing to a close this month.

Benchmark 10-year notes traded at almost a three-week low after Ukraine Acting President Oleksandr Turchynov accused Russia of invading the southern Crimea, where unidentified gunmen seized airports and other facilities. President Barack Obama said he was “deeply concerned” by Russia’s military movements. Yields rose earlier as better-than-forecast measures of consumer confidence and Chicago-area business activity reduced the refuge appeal of U.S. government debt.

The Ukraine situation “panicked the market a little bit,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Much more of it has to do with month-end buying. It’s a little bit of both.”

Benchmark 10-year yields rose one basis point, or 0.01 percentage point, to 2.65 percent at 5 p.m. New York time, Bloomberg Bond Trader data show, after rising to 2.70 percent. Yields declined to 2.63 percent yesterday, the lowest level since Feb. 7.

The gap in yields between 10-year Treasury Inflation-Protected Securities and non-indexed notes of comparable maturity, known as the break-even rate, widened by 0.01 percentage point to 2.18 percentage points, the most since Feb. 13. It has averaged 2.22 over the past year.

Ukraine Unrest

“The Russian Federation started a naked aggression against our country,” Turchynov said in a speech broadcast by the parliamentary television channel.

Thirteen planes carrying about 2,000 paratroopers have landed in the region, Serhiy Kunitsyn, a representative of Turchynov in Crimea, said on TV. Ukraine’s deposed ex-President Viktor Yanukovych told reporters earlier in the Russian city of Rostov-on-Don that he’s still the nation’s rightful leader.

Instability in Ukraine has “put some weight on Treasury yields, in terms of being lower,” said Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York. The firm oversees more than $320 billion of bonds.

The Institute for Supply Management-Chicago Inc. said its business barometer increased to 59.8 in February from 59.6 the prior month. The median forecast of 53 economists in a Bloomberg survey called for the index to fall to 56.4. Readings greater than 50 signal growth. Economists’ projections ranged from 53 to 60.

‘A Positive’

The Thomson Reuters/University of Michigan final February index of consumer sentiment rose to 81.6 from 81.2 a month earlier. The median estimate of 67 economists in a Bloomberg survey called for the measure to hold at its preliminary reading of 81.2. Estimates ranged from 78 to 82.5.

“We’ve had a pretty rough trend of late of weak data, and this coming in higher than prior as well as significantly beating the estimate is a positive” for the economy, said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Treasuries are a little softer off the back of that.”

U.S. gross domestic product grew at a 2.4 percent annualized rate from October through December, compared with the 3.2 percent gain issued last month, revised figures from the Commerce Department showed today in Washington. The median forecast of 85 economists surveyed by Bloomberg called for a 2.5 percent increase.

‘Inflationary Backdrop’

The data also showed that while price pressures remained muted, they were less subdued than previously estimated. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.3 percent annualized pace compared with a 1.1 percent rise prior estimate. The gauge climbed at a 1.4 percent pace in the third quarter.

“The market was sensing there’s a lack of inflation, all of a sudden you get some numbers that reflect a more inflationary backdrop,” said Thomas di Galoma, head of fixed income rates at ED&F Man Capital Markets Inc. in New York.

German government bonds fell for the first time in four days as concern the euro area is headed toward deflation eased, damping speculation that the European Central Bank will announce further stimulus measures next week. Consumer prices in the euro region rose an annual 0.8 percent in February, the same pace as in the previous two months, and exceeding the median estimate of 0.7 percent in a Bloomberg News survey.

Accelerating inflation reduces the allure of bonds by eroding the value of their fixed payments.

“Investors are relieved that this disinflation debate, or the risks in that regard, have lost some of their momentum,” said Michael Leister, a senior fixed-income strategist at Commerzbank AG in London. “What the market is doing is scaling back easing expectations for next Thursday’s ECB meeting.”

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