Treasuries rose for a third day, pushing 10-year note yields close to the lowest level in almost two weeks on concern Cypriot lawmakers may reject a levy on bank deposits required to secure aid, boosting refuge appeal.
The benchmark note’s yield dropped as the Federal Reserve started a two-day meeting amid speculation policy makers will decide to keep buying bonds to support economic growth. Fed Chairman Ben S. Bernanke said this month “premature” interest- rate increases would stifle the economy. A report showed new U.S. home construction rose in February and building permits climbed to the highest level in almost five years.
“It’s strictly just a flight-to-quality bid,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of 21 primary dealers that trade with the U.S. central bank. “The Fed really has to mention the economy has improved somewhat. The real fear for this market is that they change their tune somewhat and they could, because the data has changed.”
The 10-year yield dropped two basis points, or 0.02 percentage point, to 1.93% at 10:14 a.m. in New York, according to Bloomberg Bond Trader prices. The yield fell to 1.90% yesterday, the lowest since March 6. It has closed between 1.9% and 2.06% since March 5. The price of the 2% note due February 2023 rose 6/32, or $1.88 per $1,000 face amount, to 100 19/32.
Yields on 30-year bonds decreased two basis points to 3.17% after touching 3.11% yesterday, the lowest level since March 6.
Outside Issues
“The concern is not about Cyprus itself, but the potential for contagion and how it affects the rest of Europe,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We continue to be stuck in the 1.9 to 2.06 range. The market wants to go to higher yields, but because of the issues outside of the U.S. that have gained steam, there continues to be a tug of war within the range.”
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at negative 0.7%, the most expensive level since March 5. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Treasuries due in a decade or more are trading at almost the cheapest level since 2011 relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on the Treasuries reached 54 basis points higher than those in an index of other sovereign debt on March 14, the most since August 2011, the data showed. The spread was 53 basis points yesterday.
Fed Meeting
The Fed will issue a statement and economic projections after concluding its two-day policy meeting tomorrow, and Bernanke will brief reporters.
“Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading -- ironically enough -- to an even longer period of low long-term rates,” Bernanke said in a speech in San Francisco on March 1.
The central bank has held its benchmark overnight target rate for loans between banks at zero to 0.25% since 2008. The central bank is buying $85 billion a month of Treasury and mortgage debt to cap borrowing costs.
“Bernanke is leading the charge and continues to water down any hawkish talk,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “U.S. data has been uniformly strong, but the risk looking forward is that it takes a downturn. If that’s the case, yields could dip toward 1.80%.”
Fed Purchase
The Fed is scheduled to purchase as much as $3.5 billion of Treasuries today maturing from May 2020 to February 2023 as part of the stimulus program, according to the website of the Fed Bank of New York.
Builders broke ground on 917,000 homes at an annual rate, up 0.8% from a revised 910,000 pace in January that was higher than initially estimated, the Commerce Department reported today in Washington. Building permits, a proxy for future construction, advanced 4.6% to 946,000, the strongest since June 2008.
Cyprus’s Defense Minister Fotis Fotiou said the government was working on different scenarios to raise the 5.8 billion euros ($7.5 billion) that regional finance ministers set as condition for bailout amid concern the region’s sovereign-debt crisis will worsen.
The Cypriot parliament may begin discussion of legislation though it is uncertain whether a vote will be held today, Fotiou said in comments to Greek Skai TV.
Cyprus is the fifth euro country to seek a bailout since 2010. The proposed levy on depositors sparked outrage in the island nation and concern among investors about setting a precedent by breaking the taboo against raiding bank accounts.
