BLBG:Treasuries Set for Second Weekly Gain as Cyprus Spurs Safety Bid
Treasuries headed for a second weekly advance as signs that Cyprus’s banking crisis is worsening fueled demand for U.S. government debt as a haven.
Benchmark 10-year yields were below 2 percent for a sixth day as Cypriot Finance Minister Michael Sarris said the nation failed to get financial support from Russia. Cypriot lawmakers begin debate today on legislation to unlock bailout funds. The difference between U.S. two-year interest-rate swaps and similar-maturity Treasuries was set to complete the biggest weekly increase since May amid speculation the Cyprus turmoil will hurt investor confidence in global banks.
“Tension around Cyprus and weaker equity markets is spurring demand for Treasuries in the short-term,” said Ralf Umlauf, an analyst at Landesbank Hessen-Thueringen in Frankfurt. “In the mid-term we do see potential for Treasury yields slightly above 2 percent but in the short-term debt European debt crisis concerns are keeping yields low.”
The 10-year yield fell one basis point, or 0.01 percentage point, to 1.90 percent at 9:21 a.m. in London, having declined nine basis points this week, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 gained 3/32, or 94 cents per 1,000 face amount, to 100 7/8.
The two-year swap spread widened four basis points this week to 18 basis points, the biggest five-day gain since the period ended May 11. The three-month London interbank offered offered rate, to which the swap rates are linked, climbed to 0.284 percent from 0.28 percent last week. In a swap, investors exchange fixed and floating interest-rate obligations.
Widening Spread
“The widening swap spread shows risk aversion,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas SA, whose New York unit is one of the 21 primary dealers that trade directly with the Federal Reserve. “Should we see another financial crisis, it would increase interbank rates.”
Cyprus is seeking to overcome a deadlock after lawmakers rejected a 5.8 billion-euro ($7.49 billion) levy on bank deposits imposed by the European Union as a condition for a 10 billion-euro rescue. The European Central Bank said it will cut emergency funds to banks on the Mediterranean island on March 25 unless a bailout program with the EU and International Monetary Fund is in place.
While Cyprus will keep talking with Russia, “I think we are not able to get the support that we wanted to get,” Cypriot Finance Minister Michael Sarris said in an interview after checking out of the Lotte Hotel in Moscow. “But we must go back home because things are getting serious.”
‘Slow Gains’
Treasury 10-year yields have still risen 15 basis points since Dec. 31, poised for the first back-to-back quarterly increase in two years.
Treasury volatility as measured by the Bank of America Merrill Lynch MOVE index was 58.96 basis points yesterday, down from as high as 95.4 on June 15. The gauge, which tracks the outlook for swings in U.S. government debt rates, has averaged 104.6 basis points over the past five years.
“Slow gains in Treasury yields reflect the gradual improvement in the U.S. economy,” said Kiyoshi Ishigane, a senior strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees about $74 billion. “Low volatility in bond markets typically coincides with accommodative monetary policy without a rate hike in sight.”
The Fed is scheduled to buy as much as $3.75 billion of Treasuries today due from December 2018 to February 2020 as part of its efforts to bolster growth through lower borrowing costs.
Reports due for release next week may show the U.S. recovery is gaining traction. Durable goods orders rose in February while gross domestic product expanded 0.5 percent in the fourth quarter, according to economists surveyed by Bloomberg News.
“U.S. growth is likely to gather strength over the rest of the year, a clear threat to Treasuries in our books,” Societe Generale SA analysts, led by Vincent Chaigneau in Paris, wrote in a research note yesterday. “But euro area troubles are again supporting bonds.”
To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
