Treasuries Advance Before Projected Fed Guidance Revisions

Treasuries rose for the first time in three days amid speculation the Federal Reserve will tie future interest-rate increases to a range of economic indicators rather than just the jobless rate.

Benchmark 10-year yields traded in the tightest range in a week as Western leaders condemned Russian President Vladimir Putin’s push to annex Crimea and promised further sanctions. Treasuries held by investors outside the U.S. rose to a record, according to Treasury data. Bill Gross, manager of the world’s biggest bond fund, said the Fed will “focus on inflation” and keep its key borrowing rate at almost zero until late 2015 as the central bank completed the first day of a two-day meeting.

“The market is expecting the Fed to remain accommodative and won’t be looking at them to raise rates anytime soon,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The market expects continued tapering and an adjustment to the employment threshold, and that is what the Fed is going to want to telegraph to the market -- which gives investors some comfort.”

Benchmark 10-year yields dropped two basis points, or 0.02 percentage point, to 2.67 percent at 5 p.m. New York time, Bloomberg Bond Trader data showed. They traded in a range of four basis points, the least since March 11. The 2.75 percent note due in February 2024 gained 5/32, or $1.56 per $1,000 face amount, to 100 21/32.

‘Yellen’s Fed’

“Yellen’s Fed will be revealed in detail tomorrow,” Gross, the co-founder of Pacific Investment Management Co., wrote via Twitter. “Expect focus on inflation, less focus on employment.”

In its first meeting with Janet Yellen as chair after she succeeded Ben S. Bernanke last month, the committee will drop its unemployment-rate 6.5 percent threshold for when it will raise the federal funds rate in favor of more qualitative guidance, according to 41 of 54 economists in a March 14-17 Bloomberg News survey. The rate has remained at zero to 0.25 percent since December 2008.

The Federal Open Market Committee will cut monthly bond purchases to $55 billion from $65 billion while providing guidance on the outlook for interest rates, economists said in another. The central bank bought $1.154 billion of Treasuries today maturing from February 2036 to November 2043 as part of the program.

“We expect the Fed could drop the 6.5 percent and go to a more qualitative approach,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “They may taper by $10 billion.”

Inflation Gauge

The Fed’s preferred gauge of inflation, known as the personal consumption expenditures deflator, has been below the central bank’s 2 percent goal for 21 straight months and rose just rose 1.2 percent in January from a year earlier.

In the past year, the index has fallen below 1 percent three times and has never exceeded 1.5 percent. The last time inflation based on the Fed’s measure was so low during an expansion was in 1998.

Investors should buy Treasury two-year notes headed into the FOMC meeting, New-York based Citigroup strategists Neela Gollapudi wrote in a note to clients as policy makers will “change forecasts due to a decline in core PCE since the last FOMC meeting, and a drop in private sector forecasts for PCE at end of year 2014.”

Crimea Standoff

U.S. Vice President Joe Biden, in Poland to meet regional allies, predicted “additional sanctions” over what he called “a brazen military incursion.” In London, British Prime Minister David Cameron vowed to push European leaders to agree on further measures against Russia when they meet March 20.

The death of a Ukrainian soldier in Crimea in clashes as masked gunmen seized a military installation will add urgency to their deliberations.

“Don’t believe those who scare you with Russia, who yell that Crimea will be followed by other regions,” Putin told Russian lawmakers earlier, as he called on Russia to ratify a treaty to absorb the Black Sea peninsula after a March 16 referendum there supported its secession. “Crimea is our historic legacy. It should be part of a strong and stable sovereignty, which today can only be Russian.”

The situation in Ukraine “is in the mind of the market,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “There’s some flight-to-quality buying. The consensus is higher rates, but right now the safe-haven bid still exists.”

Foreign Holders

The stake in Treasuries held by investors outside the U.S. rose for a sixth month by 0.5 percent or by $30.7 billion in January, to a record $5.83 trillion, according to Treasury data. Overseas investors held 48.9 percent of the $11.83 trillion in publicly tradable U.S. government debt outstanding in January.

China, the largest foreign lender to the U.S., increased its position in Treasuries by $3.5 billion or 0.3 percent to $1.27 trillion. Holdings in Japan, the second-largest overseas lender to the U.S., jumped by $18.9 billion, or 1.6 percent, to $1.2 trillion, Treasury data show.

Russia cut its stake in U.S. government debt by 4.9 percent or $6.8 billion to $131.8 billion, the smallest position since July, according to Treasury data. The country, whose investors have the ninth-largest position in the securities among foreign nations, has averaged $145.8 billion in holdings since 2009.

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