Flight to safety as Ukraine heats up

Treasuries(CBOT:USM14) rose, pushing yields down from almost the highest levels in two weeks, as fatal clashes in Ukraine’s east spurred demand for the safety of government debt.

Treasuries fell last week as an accord was reached to start winding down the Ukraine crisis. Yields also rose last week as initial jobless claims were lower than forecast and consumer- price gains in March exceeded estimates. U.S. debt gained before the Treasury sells $96 billion in coupon-bearing notes starting tomorrow.

“It’s general uncertainty, it’s the back-and-forth headlines” on Ukraine, said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of the 22 primary dealers that trade directly with the Federal Reserve. “For now, buyers have come in.”

Benchmark 10-year yields fell three basis points, or 0.03 percentage point, to 2.69 percent as of 10:44 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note due in February 2024 gained 1/4, or $2.50 per $1,000 face amount, to 100 15/32. The yield reached 2.76 percent, the most since April 4.

The Bloomberg Global Developed Sovereign Bond Index has gained 3.4 percent this year, versus a 4.6 percent decline in 2013.

Yield Difference

Treasury 10-year notes(CBOT:TYM14) yielded 67 basis points more than their Group of Seven counterparts last week, the most in four years, as the Fed unwinds its bond-buying program while Japan and Europe consider additional purchases.

The difference between 10-year yields in the U.S. and Germany widened to 1.21 percentage points last week, the most since 2005.

The central bank is in the process of scaling back the bond-purchase program it has used to help support the economy. It has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. The central bank’s next policy meeting is April 29-30.

The Fed is scheduled to purchase up to $4 billion in Treasuries maturing between January 2019 and December 2019 today.

The Treasury Department is scheduled to sell $32 billion of two-year notes tomorrow, $35 billion of five-year securities the next day and $29 billion of seven-year debt April 24.

Auction Setup

“We’re seeing preparation for the supply this week,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “People are still looking for this bounce-back in economic activity.”

At least three people were killed in a clash in Slovyansk in eastern Ukraine, as a top security official accused Russia of exploiting the violence to prepare grounds for an invasion.

Betting against U.S. government debt this year is turning out to be a fool’s errand. Just ask Wall Street’s biggest bond dealers.

While the losses that their economists predicted have yet to materialize, JPMorgan Chase & Co., Citigroup Inc. and the 20 other firms that trade with the Federal Reserve began wagering on a Treasuries selloff last month for the first time since 2011. The strategy was upended as Fed Chair Janet Yellen signaled she wasn’t in a rush to lift interest rates, two weeks after suggesting the opposite at the bank’s March 19 meeting.

 

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