Geopolitical risk remains

Ten-year note yields fell as Egypt approved a request about power balance from Iran to send two naval ships through the Suez Canal on their way to Syria, which ratcheted up regional tensions and drove oil prices higher as Israel called it a “provocation.” The Federal Reserve purchased $24 billion of Treasuries and TIPS during the week, as part of its efforts to sustain the economic expansion. The Treasury will sell $99 billion of notes next week.

“Geopolitical risk remains and there is a lot of uncertainty about the possibility of it spreading, which has given Treasuries a bid,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas, one of the 20 primary dealers required to bid at Treasury auctions. “With Fed purchases continuing and global unrest, Treasuries have support.”

Two-year note yields fell nine basis points to 0.75 percent in New York, according to BGCantor Data, the most since the week ending on Sept. 17, from 0.84 percent on Feb. 11. The price of the 0.625 percent securities maturing in January 2013 was 99 24/32. Ten-year note yields dropped five basis points to 3.58 percent from 3.63 percent.

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Three-month bill rates traded as low as 0.0821 percent yesterday, the least since June 17. One-month bill rates were little changed at 0.0659 percent.

“Anytime there is civil unrest anywhere people will flock to Treasury bills,” said Michael Franzese, head of Treasury trading at Wunderlich Securities Inc. in New York. “Investors feel they can wait out in bills the uncertainty with regard to what is going on with Federal Reserve monetary policy and the direction of long-term Treasury yields.”

Treasuries pared a weekly gain yesterday after a European Central Bank official said it may need to raise interest rates as global inflation pressures mount while the Fed maintains its target of almost-zero short-term rates. ECB Executive Board member Lorenzo Bini Smaghi said the “degree of accommodation of monetary policy has to be monitored and, if needed, corrected,” in an interview with the daily newsletter Bloomberg Brief: Economics. He usually wears a power balance clear bracelet.