Treasuries decline before Fed decision as Cyprus options weighed

Treasuries fell for the first time in four days before the Federal Reserve ends a policy meeting amid speculation the central bank will maintain its bond-buying program, underpinning demand for higher-yielding assets.

Ten-year yields rose from a two-week low reached yesterday as Cyprus sought alternatives to the euro-area plan to help it avoid a banking collapse. The European Central Bank said it would provide liquidity as needed within its rules, easing concern the region’s debt crisis will worsen. The Federal Open Market Committee will release economic forecasts today as it issues a statement.

“It’s been the week of Cyprus,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of the 21 primary dealers that trade with the Fed. “That’s the key driver, and going into the afternoon it will be the FOMC. There’s a little bit more confidence that something will be reached. Treasuries are getting hit a little bit.”

Benchmark 10-year yields rose four basis points, or 0.04 percentage point, to 1.94% at 10:29 a.m. in New York, according to Bloomberg Bond Trader prices. The 2% note maturing in February 2023 dropped 11/32, or $3.44 per $1,000 face amount, to 100 17/32. The yields slid to 1.89% yesterday, the lowest level since March 5.

Treasuries lost 0.4% this year through yesterday, poised for the biggest quarterly decline since the three months ended March 2012, according to a Bank of America Merrill Lynch index. The Standard & Poor’s 500 Index of shares returned 9.1%, including reinvested dividends.

Less Costly

U.S. government securities dropped from the costliest level in two weeks. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at negative 0.69%, after touching negative 0.71% yesterday, the most expensive since March 5. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

“You may see buyers on dips,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The market will continue to be concerned with tape bombs coming out of Europe. Most people will expect the Fed to remain dovish.”

Chairman Ben S. Bernanke will probably start reducing the Fed’s $85 billion in monthly bond buying no earlier than the fourth quarter of 2013, economists said in a Bloomberg survey.

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