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TREASURIES-Bonds edge higher on Ukraine tensions, low inflation
March 14, 2014 / 8:27 PM / 4 years ago

TREASURIES-Bonds edge higher on Ukraine tensions, low inflation

* Tensions build ahead of referendum in Crimea

* U.S. producer prices fell in Feb.

* Consumer sentiment dipped in early March

By Sam Forgione

NEW YORK, March 14 (Reuters) - U.S. Treasuries prices edged higher on Friday on rising tensions between the West and Russia ahead of Ukraine’s weekend referendum in Crimea, while data showing continued low inflation and weak consumer sentiment supported safe-haven bids.

The West has ramped up talks of sanctions while Russia has responded with promises of retaliatory measures. Russia’s navy said on Friday that fighter jets had started training exercises over the Mediterranean Sea, an announcement likely to raise tensions in the standoff with Ukraine over Crimea’s future.

The Labor Department, meanwhile, said U.S. producer prices fell in February, dragged down by falling costs for services and offering little sign of a pickup in inflation pressures.

“It’s really hard to see how Treasuries yields could have a dramatic upward move with inflation so low and with so much political and economic uncertainty,” said said Margaret Patel, senior portfolio manager at Wells Capital Management in Boston.

Data showing weak consumer sentiment added to the demand for safe-haven bonds. The preliminary Thomson Reuters/University of Michigan overall index of consumer sentiment fell to 79.9 in March, down from the 81.6 final reading in February and marking the lowest level for the index since November.

Treasuries prices also gained slightly despite Federal Reserve data on Thursday showing foreign central banks’ overall holdings of U.S. marketable securities at the Fed plunged by more than $106 billion in the week ended March 12, with Treasury debt accounting for $104.5 billion of the drop.

“The demand for Treasuries as a safe-haven security is so overpowering it will be a positive underpinning, even if we see short-term selling on the part of any individual entity,” said Patel of Wells Capital.

Concerns over China’s economic growth also lingered, supporting demand for Treasuries. Chinese Premier Li Keqiang warned on Thursday that the economy faced “severe challenges” in 2014 while expectations of more debt defaults kept alive worries about the state of its financial sector.

“A slowing China will slow world growth,” said Matt Duch, a portfolio manager with Calvert Investments in Bethesda, Maryland. He said the concerns helped Treasuries prices maintain Thursday’s gains.

Longer-dated U.S. Treasuries prices rallied to their highest levels in over a week on Thursday on the heightened tensions ahead of the referendum in Crimea. The vote being held on Sunday by pro-Moscow authorities is to determine if Crimea will join Russia.

The yield on the 10-year Treasury bond fell 14 basis points over the week, marking the biggest weekly drop in yields since last September, according to Reuters data.

The 10-year U.S. Treasury note was last up 1/32 to yield 2.647 percent, compared with late Thursday when the yield was at 2.653 percent. Bond yields move inversely to their prices.

The 30-year Treasury bond was last up 8/32 in price to yield 3.587 percent compared with late Thursday when the yield was at 3.60 percent.

The Fed bought $1.15 billion in Treasuries maturing between Feb. 2036 and Aug. 2043 on Friday, which had a muted impact on Treasuries prices.

Traders looked ahead to the U.S. central bank’s two-day policy meeting next week, when the Fed is expected to maintain the pace of cuts to its monthly bond-buying stimulus program.

“This program has run its course and the Fed is comfortable with that,” said Duch of Calvert.

On Wall Street, all three major stock indexes fell on the tensions between the West and Russia, with the Standard & Poor’s 500 stock index last down 0.21 percent.

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