TREASURIES-Prices fall after two-day rally on Cyprus fears

Wed Mar 20, 2013 11:16am EDT

Related Topics

* Prices fall as investors ponder extent of recent rally
    * Fed statement in focus, QE timeline under scrutiny
    * Libor rates rise, suggest some fear over euro zone
contagion

    By Karen Brettell
    NEW YORK, March 20 (Reuters) - U.S. Treasuries yields rose
on Wednesday as investors reconsidered whether concern over
contagion from Cyprus's debt problems justified much lower
yields, and before the Federal Reserve was due to give its
statement from its two-day meeting.
    Benchmark 10-year Treasuries yields have fallen
to 1.94 percent by early trade on Wednesday from around 2.06
percent last week, boosted by safe haven buying as Cyprus tries
to avert a financial meltdown, which some fear could spread to
renewed stress on banks in countries including Italy and Spain.
    At the same time, improving U.S. economic data is leading
some investors to prepare for a gradual march higher in yields
and the possible tapering or end to the Federal Reserve's bond
purchase program late this year, or early next year.
    "This morning you're seeing a little bit of a recognition
that this market has gone a little too far on a short-term
basis, though that doesn't mean it will be a straight line back
the other way," said Greg Faranello, a Treasuries trader at
Societe Generale in New York.
    Cyprus pleaded for a new loan from Russia on Wednesday,
after the island's parliament rejected the terms of a bailout
from the European Union, raising the risk of default and a bank
crash. 
    Ten-year Treasuries have largely held in a range between
1.90 percent and 1.95 percent for the last three days. They were
down 11/32 in price on Wednesday.
    Thirty-year bonds fell 20/32 in price to yield
3.16 percent, up from 3.13 percent late on Tuesday.
    Several banks have raised their submissions in the London
interbank offered rate (Libor) this week, spurring some concerns
that banks and investors may again be pulling back on loans made
in the euro zone region.
    Despite this move, traders said that there were not yet any
signs that Cyprus's problems threaten broader contagion.
    "There are some accounts that are taking a wait and see
approach, but there has been no systemic issue," said Kenneth
Silliman, head of short-term rates trading at TD Securities in
New York.
    The three month U.S. dollar Libor rate increased
to 28.41 basis points on Wednesday, the highest since March 1,
and up from 28.01 basis points on Monday.
    Some of this increase may be market driven and due to the
selloff in Eurodollar futures on Monday and Tuesday, rather than
based on fundamental factors, Silliman said.
    The two-year interest rate swap spread, which
is sometimes seen as a proxy for bank credit risk, also retraced
from seven month wides on Wednesday.
    The swap rate tightened to 16 basis points, after widening 
19.50 basis points on Tuesday, the widest level since August.
    Investors are expecting few surprises from the Fed on
Wednesday, with Chairman Ben Bernanke seen likely to reference
the improving economy while saying that stimulus is likely to
continue in order to support further improvement.
    "I don't suspect we're going to get anything new," said
Faranello. That said, "the Fed is buying $85 billion a month,
the potential is for that to skew lower not higher."
    Most Wall Street economists expect that the Fed will taper
or end bond purchases at the end of the year.
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