Treasuries Gain Pushes Yield to 2-Month Low on Ukraine

Treasuries rose, with 10-year yields touching the lowest level since May, as investor demand for safety increased on concern that tensions are escalating between Russia and western nations over Ukraine.

Government bonds pared the advance after U.S. stocks jumped the most in two days on energy gains before closing little changed. NATO said there’s a risk of Russia sending troops into Ukraine. The Treasury said in its quarterly refunding announcement it will sell $67 billion of notes and bonds next week, $2 billion less than three months ago. Data yesterday showed the U.S. services sector grew at the fastest pace since 2005 in July.

“It’s been a difficult trade for most participants as economic fundamentals battle against geopolitical stuff,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It’s the fear of the Russia and Ukraine situation escalating. Unless you feel the economy will not recover, rates are too low.”

The benchmark 10-year note yield fell one basis point, or 0.01 percentage point, to 2.47 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The 2.5 percent note maturing in May 2024 rose 1/8, or $1.25 per $1,000 face amount, to 100 1/4. The yield slid earlier to 2.43 percent, the least since May 29.

The five-year note yield dropped two basis points to 1.65 percent and touched 1.62 percent, the lowest level since July 18. The 30-year bond yield declined one basis point to 3.27 percent after falling as much as six basis points earlier. It reached 3.22 percent on July 29, the least since June 7, 2013.

Lower Volume

The amount of Treasuries traded through Icap Plc, the largest inter-dealer broker of U.S. government debt, fell 9 percent to $300 billion, from $329 billion yesterday. Volume reached $504 billion on Aug. 1, the highest in three months, and fell on Aug. 4 to $197 billion. The daily average volume this year is $327 billion.

The U.S. will sell $27 billion of three-year notes, $24 billion of 10-year debt and $16 billion of 30-year bonds on three consecutive days starting Aug. 12, the Treasury said.

The government auctioned $69 billion of the securities three months ago, including $29 billion of three-year notes. That amount was reduced to $27 billion by the July auction of the maturity.

“Based on current fiscal forecasts, coupon auction sizes will remain steady going forward,” the department said in a statement today in Washington.

Buyback Tests

The department also said it will conduct small-scale buybacks this fiscal quarter to test information-technology systems. The purchases don’t signal a change in policy, it said. In April, the Treasury Borrowing Advisory Committee recommended buybacks as an option to manage variations in seasonal financing needs.

Purchases of outstanding U.S. debt by the Treasury from investors may go beyond tests of information-technology systems, according to some of Wall Street’s biggest bond traders.

Treasury’s borrowing needs this quarter fell to the lowest level for the period since 2007 as a stronger economy boosts tax revenue, spurring speculation the U.S. would consider purchases to maintain the issue size of current debt maturities sold in case revenue projections change. The Treasury last bought back bonds in April 2002.

Russian Troops

Yields declined amid the turmoil over Ukraine. The U.S. joined NATO and Poland in warning about the risk of Russia sending troops into Ukraine after saying President Vladimir Putin massed soldiers on his country’s western border. Russia said the reports of its military buildup were “groundless.”

The threat of a Russian incursion is “reality,” U.S. Defense Secretary Chuck Hagel told reporters in Germany today. Earlier, the North Atlantic Treaty Organization said there’s a threat of Russian troops crossing the border under the “pretext” of a humanitarian or peacekeeping mission.

“It’s all risk-off,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 22 primary dealers that trade with the Federal Reserve. “It’s hard to fight the flight-to-quality flows.”

Jersey recommends avoiding five-year Treasuries because the yields will probably increase to meet projections for the Fed to raise interest rates.

The Standard & Poor’s 500 Index rose as much as 0.4 percent today before erasing gains. It fell 0.5 percent earlier.

Bond Strips

The amount of U.S. Treasury bonds held as zero-coupon debt rose to the highest level on record in July amid demand for longer-term securities. Zero-coupon debt, or strips, short for separate trading of registered interest and principal securities, is created by Wall Street firms that split bonds into their face amount and individual coupon payments.

The amount of bond strips rose by 0.03 percent to $206.02 billion, the most in data going back to April 1996, according to Treasury Department figures released today.

Treasuries also rose with their German counterparts as data showed German factory orders fell and Italy returned to recession. Germany’s 10-year bund yield fell to a record 1.10 percent today.

The Institute for Supply Management’s non-manufacturing index increased to 58.7 in July, the highest level since December 2005, from 56 the prior month, the Tempe, Arizona-based group said yesterday. A reading greater than 50 signifies expansion.

Fed funds futures contracts show a 73 percent probability the central bank will increase its benchmark interest-rate target to 0.5 percent or more by September 2015.

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