Treasury yields rise from lowest in week before Fed amid Crimea

Treasury yields (CBOT:ZNM14) rose from the lowest in more than a week before the Federal Reserve begins a two-day meeting tomorrow that analysts said will see policy makers further scale back bond-purchase stimulus.

U.S. debt dropped, after posting the biggest advance in two months last week, even as the U.S. and European Union warned Russia it will face sanctions if it annexes Crimea. The Fed is forecast on March 19 to cut its monthly stimulus bond purchases to $55 billion while providing guidance on the future of interest-rate increases. A measure of general business conditions in the New York area rose as U.S. industrial production climbed the most in six months.

“They’re going to taper down to $55 billion -- the more important element will be forward rate guidance,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 22 primary dealers that trade with the Fed. “Manufacturing over the last few months showed points of weakness, mostly being attributable to weather. We’re starting to see signs of stabilization.”

Benchmark 10-year yields rose one basis point, or 0.01 percentage point, to 2.67% at 10:54 a.m. New York time after dropping 13 basis points last week, the most since the period ended Jan. 10, Bloomberg Bond Trader data showed. They touched 2.61% on March 14, the lowest since March 4. The 2.75% note due February 2024 dropped 3/32, or 94 cents per $1,000 face amount, to 100 23/32.


Manufacturing, Production

The Fed Bank of New York’s Empire Manufacturing index climbed to 5.61 this month, from 4.48 in February. Readings of greater than zero signal expansion in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey of 55 economists called for a reading of 6.5.

The 0.8% gain at manufacturers followed a revised 0.9% slump in the prior month that was the biggest since May 2009, figures from the Fed showed. The median forecast called for a 0.3% advance. Total industrial production rose 0.6%, more than projected.

Economists and strategists in a Bloomberg News survey lowered their forecasts for how much the 10-year yield will increase at year-end. The rate will rise to 3.35% in the fourth quarter, according to a survey conducted March 7-12, down from 3.40% in a survey last month.

Hedge-fund managers and other large speculators increased their net-short positions in 10-year note futures in the week ending March 11, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets that prices will fall, outnumbered long positions by 118,210 contracts, the most since Feb. 11, on the Chicago Board of Trade.

Fed Outlook

The policy-setting Federal Open Market Committee will hold its first meeting led by Chair Janet Yellen, who succeeded Ben S. Bernanke last month. The central bank in January reduced monthly bond purchases to $65 billion, citing labor-market indicators that “were mixed but on balance showed further improvement.”

The Fed left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5%. The target rate has remained unchanged at zero to 0.25% since December 2008.

“We are focusing on the fundamental picture and the upcoming Fed meeting,” said John Stopford, head of fixed income at Investec Asset Management in London. “The market is in a wait-and-see mode as far as Russia and Crimea are concerned, as a lot of bad news appeared to have been in the price.”


Crimea Tensions

President Barack Obama om March 17 imposed sanctions on seven top Russian government officials and added four others from Ukraine, including the former president, who the U.S. says threaten peace and security. The actions, which mark the broadest use of sanctions on Russia since the end of the Cold War, were made in concert with the 28-member European Union, which imposed its own set of penalties.

About 97% of the voters in the southern Ukraine region who took part backed joining Russia, preliminary results showed. The Ukrainian government, the EU and the U.S. consider the vote illegal, while Russia said it “fully met international norms.” The Kremlin has deployed about 60,000 troops along the Ukrainian border, the government in Kiev said. Dmitry Rogozin, and Yelena Mizulina.

“Today’s actions send a strong message to the Russian government that there are consequences for their actions that violate the sovereignty and territorial integrity of Ukraine, including their actions supporting the illegal referendum for Crimean separation,” the White House said in a statement.

Treasury trading volume rose to $582.4 billion on March 13, the highest in more than nine months, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It was at $447.6 billion on March 14.

 
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