Treasuries Post Largest Weekly Gain in 2 Months on Crimea Unrest

Treasuries posted the biggest weekly gain in two months as unrest in the Ukraine drove investors to the safety of U.S. government debt.

Yields on the benchmark 10-year note touched the lowest level in 10 days as top diplomats from the U.S. and Russia failed to defuse the standoff over Ukraine, with Crimea readying to vote on joining Russia. Estonia said earlier that Russia was preparing to invade eastern Ukraine. U.S. government securities held in custody at the Federal Reserve fell by the most on record, fueling speculation Russia shifted its holdings out of the U.S. amid threatened sanctions.

The market has been driven by “fear of the Ukraine situation,” said Jeffry Feigenwinter, head of Treasury trading in New York at Societe Generale SA, one of 22 primary dealers that trade Treasuries with the Fed. “The 2.60 percent level is major resistance. If Russia actually invades, it has the potential to drop, but that should hold.”

Benchmark 10-year yields rose one basis point, or 0.1 percentage point, to 2.66 percent at 5 p.m. in New York after touching 2.61 percent, lowest since March 4, Bloomberg Bond Trader data showed. The yield slid as much as 18 basis points this week before dropping 13 basis point, the most since the period ended Jan. 10. The price of the 2.75 percent note due February 2024 fell 3/32, or 94 cents per $1,000 face value, to 100 26/32.

The yield fell through its 200-day moving average of 2.67 percent yesterday, a level some traders use as a gauge of where orders to buy and sell are set.

The Bloomberg U.S. Treasury Bond Index is little changed for March. It’s up 2.1 percent in 2014 through yesterday.

Crimea Referendum

Treasuries held in custody at the Fed by foreign central banks dropped by $104 billion to $2.86 trillion in the week ending March 12, according to Fed data. As of December, Russia held $138.6 billion of Treasuries, making it the ninth largest country holder. Russia’s holdings are about 1 percent of the $12.3 trillion in marketable Treasuries outstanding, according to data compiled by Bloomberg.

Russian President Vladimir Putin “is not prepared to make any decision regarding Ukraine until after the referendum on Sunday,” U.S. Secretary of State John Kerry told a news conference today after six hours of talks in London with Russian Foreign Minister Sergei Lavrov. There was “no common vision” on resolving the crisis, Lavrov said.

‘Very Bad’

Estonian Defense Minister Urmas Reinsalu said in an e-mailed statement that events in Ukraine “clearly show that the Russian Federation only accepts force.” To deter Putin, “a clear message needs to be sent that an attack will cost the aggressor dearly,” he said.

“Treasuries, bunds and gilts lead in this kind of move,” Steven Major, head of global fixed-income research at HSBC Holdings Plc, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton and Anna Edwards. “It’s very difficult to imagine a scenario whereby everyone just kind of kisses and makes up, so on Monday morning it’s not going to be a case of everything’s fine. It’s either going to be very very bad, or very bad.”

German 10-year bund yields fell as much as four basis points to 1.50 percent, the lowest since July, and U.K. 10-year gilt yields dropped as much as five basis points to 2.64 percent.

Volume Surge

Treasury trading volume this week rose to the highest in more than nine months yesterday, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It touched $581 billion, the highest since May 31. Volume dropped 23 percent today to $446 billion, according to ICAP, above this year’s average of $337 billion.

In China, industrial output and retail-sales growth cooled more than economists estimated in January and February, government data showed yesterday.

“People are a little bit nervous about Ukraine; China is on people’s minds,” said Brian Edmonds, the head of interest-rates trading in New York at primary dealer Cantor Fitzgerald LP. “You combine that and it means a monstrous bid for bonds starting yesterday. People need long-end duration now. That’s what people are grabbing.”

Bidding at an auction of benchmark 10-year notes this week rose to the highest in a year. Investors submitted bids for 2.92 times the amount of debt available, the highest level in a year.

Net Shorts

Producer prices in the U.S. unexpectedly dropped in February, with a 0.1 percent decrease in the producer-price index following a 0.2 percent rise the prior month, a Labor Department report showed today in Washington. The median estimate in a Bloomberg survey called for a 0.2 percent increase. Over the past 12 months, wholesale prices rose 0.9 percent.

Treasuries rose yesterday even as retail sales climbed more than analysts expected last month and initial jobless claims fell last week.

Hedge-fund managers and other large speculators increased their net-short position 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 prices will fall, outnumbered long positions by 118,210 contracts, the most since Feb. 14, on the Chicago Board of Trade. Net-short positions rose by 16,840 contracts, or 17 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

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