March 20, 2013 / 7:33 PM / 4 years ago

TREASURIES-Prices fall after rally on Cyprus worries; Fed on hold

* Fed holds aggressive stimulus in place
    * Prices fall as investors ponder extent of recent rally
    * Cyprus now seeking a new loan from Russia

    By Luciana Lopez
    NEW YORK, March 20 (Reuters) - Prices for U.S. Treasuries
dropped on Wednesday as investors weighed the extent of a rally
this week sparked by a proposed Cypriot tax on bank accounts,
with the Federal Reserve keeping policy on hold.
    The Fed will keep pumping up to $85 billion into the economy
each month until the job market gets significantly better,
though Chairman Ben Bernanke said the bank could vary the rate
of purchase as the economy improves. 
    And while there are risks to persistently low interest
rates, for now the bank can handle those risks, Bernanke said at
a news conference concluding a two-day policy meeting.
    "In the committee's view these costs remain manageable but
will continue to be monitored, and we will take them into
appropriate account as we determine the size, base and
composition of our asset purchases," he said.
    Analysts said there was little surprising in the Fed's
statement.
    "We have been and continue to take the Fed at its word,"
said Henry Smith, chief investment officer at Haverford Trust Co
in Philadelphia.
    "The fact is, the Fed is committed to this, call it an
all-in policy, for the foreseeable future." 
    Prices pared losses slightly on the news but remained lower
on the day.
    The benchmark 10-year note was trading down 9/32
in price to yield 1.936 percent after the statement.
    Prices for the 30-year bond briefly spiked even
lower after the news but then pared losses. Those bonds were
last down 24/32 in price to yield 3.170 percent.
    Prices for U.S. Treasuries gained this week after fears that
a tax on bank deposits to help fund a bailout for Cyprus could
be adopted elsewhere in the euro zone, including Italy and
Spain.  
   Cypriot lawmakers overwhelmingly rejected the deeply
unpopular tax on Tuesday, and the island nation is now pleading
for a new loan from Russia to avert a financial meltdown.
    
    There's now some 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.
    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.

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