Treasuries drop for first time in 4 days as Fed sustains stimulus

Treasuries declined for the first time in four days as the Federal Reserve reiterated its commitment to asset purchases to spur economic growth, sustaining demand for higher-yielding assets.

The difference in yields between inflation-protected U.S. debt and 10-year notes held at 2.54 percentage points, higher than average, as policymakers said the jobless rate remains "elevated" and the Fed will keep buying $85 billion of bonds a month. Yields rose earlier as Cyprus weighed options on how to secure a bailout package after rejecting a levy on bank deposits, lessening the refuge appeal of U.S. government debt.

"It's steady as she goes," said Richard Schlanger, who is a member of a group managing $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. "The Fed is concerned that there are deeply embedded problems, and that's why they're willing to continue to provide this accommodation in the near term."

Ten-year note yields rose four basis points, or 0.04 percentage point, to 1.94 percent at 2:36 p.m. New York time after touching 1.89 percent Tuesday, the lowest level since March 5. The yield has closed between 1.9 percent and 2.06 percent since March 5.

"Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated," the Federal Open Market Committee said Wednesday at the conclusion of a two-day meeting in Washington. Recent data suggest "a return to moderate economic growth following a pause late last year."

Stocks rose, with the Standard & Poor's 500 Index approaching a record high.

"It's clear the Fed is still maintaining an easing mode and will keep rates low for a considerable period,” said Donald Ellenberger, a money manager who oversees about $12 billion at Federated Investors in Pittsburgh.

Policy makers lowered their expectations for the unemployment rate at the end of the year to a range of 7.3 percent to 7.5 percent from a previous forecast of 7.4 percent to 7.7 percent. The economy will expand 2.3 percent to 2.8 percent this year, they estimated, compared with their earlier forecast of 2.3 percent to 3 percent growth.

Bond purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. The Fed said the purchases will continue until “the outlook for the labor market has improved substantially in a context of price stability” and that it will continue to reinvest maturing securities.

The objective of the buying, under the quantitative-easing stimulus strategy, is to drive investors to higher-risk assets and avoid deflation.

The Fed also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.

Economists in a Bloomberg News survey forecast before the meeting that the Fed won’t slow the pace of its buying until at least the fourth quarter. The current round of purchases will total $1.15 trillion by the program’s conclusion, according to the median estimate in the poll of 46 economists.

Treasuries have lost 0.1 percent in March as the U.S. economy gained traction, paring February’s 0.6 percent return, a Bank of America Merrill Lynch index showed.

Ten-year yields reached an 11-month high of 2.08 percent on March 8 after the Labor Department said U.S. employers added 236,000 jobs last month, beating a Bloomberg survey’s median forecast for a gain of 165,000. Payrolls have increased by an average of 205,000 jobs a month since November. The jobless rate was 7.7 percent last month, versus 10 percent in October 2009.

Consumer prices rose 2 percent last month from a year earlier, a separate government report showed last week.

Ten-year yields dropped one basis point to 1.99 percent following the last Fed statement on Jan. 30, when policy makers pledged to keep buying bonds.

The benchmark yields fell two basis points to 2.01 percent on Feb. 20 after the release of January meeting minutes showed several policy makers said the Fed should be ready to vary the pace of its purchases amid concern about the risks and benefits of further quantitative easing.

The central bank spent $2.3 trillion purchasing Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds of quantitative easing.

The yield gap between 10-year Treasury Inflation Protected Securities and nominal U.S. notes, called the 10-year break-even rate, signals traders’ outlook for consumer prices over the life of the debt. It closed at 2.51 percentage points on Feb. 26 and averaged 2.36 percentage points over the past year.

The Fed’s measure of traders’ inflation expectations for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, has climbed since the central bank announced on Sept. 13 it would begin a third round of bond buying. It started open-ended monthly purchases of $40 billion of mortgage debt, and in December decided to add $45 billion of Treasuries a month.

The gauge reached 2.89 percent on Jan. 29, the highest since August 2011, from 2.61 percent on Sept. 12. It was 2.81 percent on March 15.

Treasuries declined earlier as euro-area leaders and Cypriot officials weighed options after the Mediterranean nation rejected an unprecedented levy on bank deposits that’s a condition for a European Union-led bailout.

Stocks gained amid speculation that the European Central Bank will continue to support Cyprus’s banks until next week, easing concern the turmoil will worsen Europe’s three-year-old sovereign-debt crisis.