Developed Bonds Advance as Ukraine Tension Drives Safety Demand

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U.S. Treasuries held gains from yesterday amid demand for safety afterUkraine said Russia threatened to seize its warships in Crimea.

Ten-year yields were at or near the lowest in at or near least three months for 19 of 25 developed markets tracked by Bloomberg as U.S. Secretary of State John Kerry arrives in Kiev today amid the worst standoff between Russia and the west since the Cold War. The U.S., Germany, Japan and Australia were among nations with yields at the bottom of their three-month range. The 10-year Treasury yield touched a one-month low yesterday, slipping below the 200-day moving average.

“Ukraine-Russia developments are front and center of market concerns,” said Su Lin Ong, a senior economist at Royal Bank of Canada in Sydney. “Bonds overall, and Treasuries in particular, are clearly benefiting.”

U.S. 10-year yields were little changed at 2.61 percent as of 11:38 a.m. in Tokyo from yesterday, when it touched 2.59 percent, the lowest level since Feb. 4, Bloomberg Bond Trader data show. The price of the 2.75 percent note maturing in February 2024 was at 101 7/32.

Australia’s 10-year yield was at 3.99 percent, after dropping to as low as 3.96 percent yesterday, the lowest since Feb. 4. It capped a sixth straight decline yesterday, the longest run since October 2012.

Japan’s 10-year yield rose half a basis point, or 0.005 percentage point, to 0.58 percent after touching 0.57 percent yesterday, a level not seen since May. Japan’s Ministry of Finance will sell about 2.4 trillion yen ($23.6 billion) of the securities maturing in 2024 today.

Crimea Tensions

Russia told the ships to surrender, Ukraine’s acting President Oleksandr Turchynov said yesterday in televised remarks. Russia earlier denied a report it had given the ships, located near the port of Sevastopol, until 5 a.m. to give up weapons and capitulate.

Crimea has become the focal point of Ukraine’s crisis after an uprising triggered last month’s ouster of PresidentViktor Yanukovych. Ukraine has mobilized its army and called for foreign observers after Russian forces took control of the peninsula. Russia, which keeps its Black Sea fleet at Sevastopol, raised its main interest rate to 7 percent from 5.5 percent yesterday after the ruble tumbled to a record.

The 10-year Treasury remained under the 200-day moving average at 2.64 percent after falling below it yesterday for the first time since May. The benchmark yield held above the lower Bollinger (USGG10YR) band.

“We’ve broken through some key technical levels, and that’s keeping the bias to the downside for U.S. Treasury yields,” said RBC’s Ong. “The question you have to ask yourself is what drives yields there. The fundamentals would not be consistent with yields down at these levels. Given the weather distortions, the odds are the second quarter will look fairly decent.”

U.S. Economy

Treasuries briefly pared gains after the Institute for Supply Management report showed yesterday manufacturing in the world’s largest economy expanded faster than economists forecast. The ISM index of manufacturing rose to 53.2 in February from 51.3 a month earlier, data yesterday showed. Readings above 50 signal expansion. Manufacturing accounts for about 12 percent of the U.S. economy.

Companies probably added 155,000 workers to payrolls last month after a 175,000 increase in January, according to the median estimate of economists surveyed by Bloomberg before the data from the ADP Research Institute tomorrow.

The Standard & Poor’s 500 Index (SPX) of shares fell 0.7 percent yesterday.

“The market is inclined to be more risk averse amid concern the uncertainties in Ukraine will be prolonged,” said Shuichi Ohsaki, a rates strategist in Tokyo at Bank of America Merrill Lynch. “U.S. stocks declined even though economic data came in stronger than expected, underlining the fact that investors are focused on problems in Ukraine. That will be a tail wind for bonds.”