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Treasurys slip as Crimea tensions ease; Fed eyed

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U.S. Treasurys fell on Monday after Sunday's referendum in Crimea passed without major violence, reducing safety demand for U.S. government bonds, and before the Federal Reserve's highly anticipated meeting on Tuesday and Wednesday.

Crimea formally applied to join Russia on Monday after its leaders declared a Soviet-style 97-percent result in favor of seceding from Ukraine in a referendum condemned as illegal by Kiev and the West that will trigger immediate sanctions.

The passing of the referendum helped investors unwind safety buying that took place on Friday on concerns of increasing tensions over the weekend.

"The Russian bond market has rallied back, some of the flight-to-quality we saw going into the weekend has subsided and now we are waiting for the Fed on Wednesday,'' said Tom Tucci, head of Treasuries trading at CIBC in New York.

Benchmark 10-year notes fell 12/32 in price on Monday to yield 2.697 percent, up from 2.65 percent late on Friday and in the middle of a two-month long range that has kept yields between 2.57 percent and 2.82 percent.

The central bank is expected to continue to reduce the size of its bond purchase program, but also alter its forward guidance when it gives its statement from its two day meeting on Wednesday.

(Read more: Are bonds still a safe bet? It depends)

"They are going to move away from thresholds on specific economic indicators and take a more wholistic approach that depends on subjective evaluation of a broad array of economic indicators. They are trying to move back to a more normal approach to policy,'' said Ward McCarthy, chief financial economist at Jefferies in New York.

The Fed previously said that it would not raise interest rates until joblessness fell to at least 6.5 percent, a pledge that policymakers thought would hold until at least mid-2015.

But that rate hit a five-year low of 6.6 percent in January, before rising to 6.7 percent in February. The Fed is seeking to hold short-term rates at record lows as it gradually unwinds its monetary stimulus, and it is expected to cut the size of its monthly bond purchases by an additional $10 billion this week.

Rates are seen as likely to continue to stay relatively low in the near-term, however, as economic data still shows mixed growth prospects, and after a recent bout of weakening data that is seen at least partly due to bad weather.

Prices fell slightly after data showing U.S. manufacturing output rebounded more than expected in February and recorded its largest increase in six months, in the latest sign that economic activity is gaining momentum after being dampened by severe weather.

"It's going to be an increasing challenge for the Fed to keep short-term rates low, and I think they will succeed during this period when we continue to see mushy economic data. But beyond that, once we start seeing more solid growth, then we will start seeing more volatility at the front-end of the curve,'' said McCarthy.

The Fed bought $2.54 billion in notes due 2019 to 2021 on Monday as part of its ongoing purchases. It will buy between $1 billion and $1.25 billion in bonds due from 2036 to 2044 on Tuesday.

A New York Federal Reserve gauge of manufacturing in New York state also rose in March though at a slower rate than forecast, as new orders and inventories jumped.

U.S. homebuilder sentiment edged up in March but sentiment remained mostly poor as concerns linger, the National Association of Home Builders said on Monday.

—By Reuters

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