Treasuries rose as concern Cyprus’s banking crisis will worsen the euro area’s sovereign-debt turmoil underpinned demand for safer assets.
U.S. government securities briefly pared gains after sales of previously owned U.S. homes rose. Treasuries advanced as the European Central Bank said it will cut Cypriot banks off from emergency funds after March 25 unless the nation agrees on a bailout with international creditors. Federal Reserve policy makers said yesterday they will keep buying bonds at a pace of $85 billion a month to spur growth and reduce unemployment.
“The market is reacting to headlines as they come out,” Dan Mulholland, head of U.S. Treasury trading in the capital- markets unit of BNY Mellon Corp. in New York, said of the Cyprus crisis. “There are conflicting messages all the time. There’s the fear of some sort of contagion to peripheral Europe. We’re not seeing rising yields.”
The benchmark 10-year yield dropped three basis points, or 0.03 percentage point, to 1.93% at 10:27 a.m. in New York after climbing six basis points yesterday, the biggest increase since March 7. The 2% note maturing in February 2023 rose 9/32, or $2.81 per $1,000 face amount, to 100 21/32.
The yields have traded this month within a 22 basis-point range at closing, from 1.84% on March 1 to 2.06% on March 11.
Treasuries lost 0.6% this year through yesterday, poised for the biggest quarterly drop since the three months ended March 2012, a Bank of America Merrill Lynch Index showed.
U.S. government securities due in a decade or more have been 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, near the most since August 2011, the data showed. The spread was 53 basis points yesterday.
Cyprus is seeking to overcome a deadlock after lawmakers rejected a 5.8 billion-euro ($7.5 billion) levy on bank deposits imposed by the European Union as a condition for a 10 billion- euro rescue. Cypriot officials are asking Russia, which granted the nation a 2.5 billion-euro loan in December 2011, to delay repayment until 2021 and grant a new facility of 5 billion euros, Vedomosti newspaper reported, without citing anyone.
The ECB’s Governing Council decided to maintain its current level of Emergency Liquidity Assistance for Cyprus until March 25, the central bank said in an e-mailed statement. After that, ELA may only be considered if the EU and International Monetary Fund program is in place that would ensure the solvency of the concerned banks, it said.
“The longer Cyprus is not dealt with, the more fear festers in the market about contagion, which continues to support Treasuries,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “People don’t want to be short headed into the weekend. Even if you think it’s not a bad situation, you can’t fight the market right now.” Short positions are bets an asset will fall.
Treasuries trimmed their advance after sales of existing U.S. homes increased 0.8% in February to a 4.98 million annualized rate, the most since November 2009, figures from the National Association of Realtors showed today in Washington. The median forecast of 77 economists surveyed by Bloomberg called for an increase to a 5 million pace.
Labor Department data showed applications for jobless benefits increased by 2,000 to 336,000 in the week ended March 16. Economists projected 340,000 claims, according to the median estimate in a Bloomberg survey. The monthly average dropped to the lowest since February 2008.
The Treasury will announce today it will auction $35 billion of two-year debt on March 26, the same amount of five- year notes the next day and $29 billion of seven-year securities on March 28, according to Wrightson ICAP LLC, an economic advisory company based in Jersey City, New Jersey. The government is scheduled to sell $13 billion of 10-year inflation-linked notes today.
The yield gap between 10-year Treasury Inflation Protected Securities and nominal U.S. notes, which signals traders’ outlook for consumer prices over the life of the debt, narrowed to 2.54% today, down from a closing-basis high this year of 2.59% on March 14. The measure, called the 10-year break-even rate, has averaged 2.36% over the past year.
The Fed will buy as much as $1.75 billion of Treasuries maturing from February 2036 to February 2043 today under its quantitative-easing program aimed at stimulating the economy through lower borrowing costs.
“Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated,” the Federal Open Market Committee said yesterday at the end a two-day meeting in Washington. Recent data suggest “a return to moderate economic growth following a pause late last year.”