Treasuries Drop Before Fed Meets as Foreign Banks Cut Holdings

Treasuries declined amid speculation the Federal Reserve will signal next week that interest rates may go up as early as June as the pace of economic recovery no longer warrants virtually zero benchmark borrowing costs.

The securities weren’t helped by a report Thursday showing central banks cut their Treasuries held in custody at the Fed to the lowest level in almost a year. That spurred speculation that central banks have sold holdings, exchanging the dollars and bringing the proceeds home, to protect their own currencies. The Fed, which has pledged to be “patient” on tightening monetary policy, will meet next week.

“Treasuries are down as investors are nervous whether the Fed will drop ‘patient’ from its statement, a move that would probably be followed by a rate increase in June,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Data on holdings, especially China’s, may have weighed on Treasuries. A key issue for China is whether they allow the yuan to depreciate going forward.”

Benchmark 10-year yields rose one basis point, or 0.01 percentage point, to 2.13 percent as of 7:15 a.m. New York time. The 2 percent note maturing in February 2025 dropped 1/8, or $1.25 per $1,000 face amount, to 98 27/32.

‘Patient’ Debate

Policy makers replaced “considerable time” with “patient” in the December statement in describing how the central bank plans to normalize its monetary stance after providing unprecedented stimulus to the economy following the financial crisis.

Treasuries also declined before a report on Friday that economists forecast will show producer prices rebounded in February amid signs that disinflation may have been bottoming out.

The Bloomberg Dollar Spot Index, which tracks the performance of the greenback against 10 currencies, closed at a record high Wednesday.

Foreign central banks, which are among the biggest buyers of U.S. government bonds, cut their stakes held at the Fed to $2.92 trillion, based on data from the U.S. central bank Thursday in New York. It was the lowest since the five-day period ended March 26, 2014.

Falling yuan positions at Chinese financial institutions suggest the central bank has intervened this year to curb yuan weakness as the currency traded near the limit of its permitted trading range, according to Barclays Plc.

China, America’s largest foreign creditor, cut its holdings of U.S. debt for a fourth month in December, based on the latest figures from the Treasury Department. Its stake of $1.24 trillion was the smallest in almost two years.

Russian Ruble

In Russia, the Bank of Russia reiterated last month that it may intervene in the currency market if needed, according to state-run news service RIA Novosti. Central banks intervene when they buy or sell currencies to influence exchange rates. The ruble has plunged about 40 percent versus the dollar in the past 12 months, according to data compiled by Bloomberg.

Russia cut its holdings of U.S. debt by 20 percent in December, the Treasury data show. Its stake amounted to $86 billion, the lowest level since 2008.

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