By Richard Leong
NEW YORK, May 22 (Reuters) - Treasury debt prices fell on
Wednesday with benchmark yields briefly rising above 2 percent
as Federal Reserve Chairman Ben Bernanke kept alive market
worries that the U.S. central bank might slow its bond purchases
later this year if the economy improves further.
Bernanke initially delivered what bond bulls had hoped for
following dovish remarks from two top Fed officials on Tuesday,
telling federal lawmakers in prepared remarks the Fed's current
policy has produced significant benefits and cautioning that a
premature pullback would hurt the economy. These remarks lifted
bond prices to session highs in early trading.
A half hour later, however, the bond market's gains swiftly
evaporated and crossed into negative territory when Bernanke
said tapering of the Fed's bond purchases by September was
probable if data show U.S. growth is on a sustainable path.
'If we see continued improvement and we have confidence that
that's going to be sustained, then we could in the next few
meetings, we could take a step down in our pace of purchases,'
Bernanke said during the question-and-answer portion of his
testimony before the congressional Joint Economic Committee.
Fed policymakers will meet next on June 18-19.
Speculation has intensified as to whether the Fed might
reduce its third round of large-scale asset purchases, known as
quantitative easing or QE3, ever since a better-than-expected
April jobs report earlier this month.
'His prepared remarks were dovish, but some people were
obviously surprised by his tapering comment during the Q&A,'
said Kathy Jones, fixed-income strategist at Charles Schwab in
On the open market, benchmark 10-year Treasury notes fell 25/32 in price to trade at 97-19/32 with a
yield of 2.021 percent, up 9.1 basis points from late on
Tuesday. The 10-year note's yield touched 2.044 percent - its
highest level since mid-March and has risen about 0.40
percentage point since May 1.
The 10-year yield fell just short of 2 percent on Tuesday as
it retreated following dovish comments from St. Louis Fed
President James Bullard and New York Fed chief William Dudley. A
rally in mortgage-backed securities, fueled by Dudley's comments
about the Fed being unlikely to sell its mortgage holdings,
spurred investors to buy Treasuries.
Traders and analysts have reckoned whether the Fed might
taper QE3, which involves monthly purchases of $85 billion in
Treasuries and mortgage-backed securities, sooner than
previously thought in response to an improving economy, albeit
one still growing at a sluggish pace.
Recent comments from several Fed policymakers have stoked
this view, causing a selloff in Treasuries that sent benchmark
yields on Tuesday to their highest in over two months.
Still it is the view of Bernanke as head of the U.S. central
bank that carries the most weight in financial markets.
'Bernanke is the man-in-charge,' said Larry Milstein, head
of U.S. agency and government trading at R.W. Pressprich & Co in
Despite his tapering remark, Milstein and Schwab's Jones
both see the Fed as committed to its current pace of bond
purchases as unemployment has remained high and the economy
still faces the drag from fiscal constraints as well as the
European debt crisis.
'It's full steam ahead with QE for now. They will err on the
side of easy policy,' Milstein said.
Bernanke's testimony before the congressional panel was seen
as the week's premier event in the Treasury market. The Fed
chairman was expected to signal whether or not the central bank
is ready to start rolling back its ultra-easy monetary stance
after keeping U.S. interest rates near zero and buying bonds for
more than four years.
Investors might receive more clues about the Fed's thinking
on the path of monetary policy when it releases the minutes of
its April 30-May 1 policy meeting at 2 p.m. EDT (1800 GMT).
The Fed's balance sheet has ballooned to $3.3 trillion as of
May 15 as its Treasuries holdings have more than quadrupled
since it adopted quantitative easing in late 2008 to $1.86
Its ownership of mortgage-backed securities totaled $1.15
trillion last week, compared with none in September 2008, just
before the collapse of Lehman Brothers amid the global financial
Critics have said the Fed's massive balance sheet will
hobble its ability to fight inflation down the road, and that
the billions with which it has flooded the economy may be
overheating certain markets such as stocks and junk bonds.
The U.S. central bank is scheduled to buy $1.25 billion in
Treasuries due February 2036 to May 2034 after it purchased
$1.450 billion of these federal debt maturities on Monday.
After two days bereft of major economic data, the National
Association of Home Builders said will release at 10 a.m. EDT
said U.S. home resales accelerated to a 4.97 million annualized
unit rate in April, the strongest monthly pace in nearly
3-1/2-years. Economists projected an annualized rate of 4.99
(Reporting by Richard Leong; editing by Chizu Nomiyama, G
(-------------- MARKET SNAPSHOT AT 1251 EDT (1651 GMT) --------------------- June T-Bond 143-1/32 (-1-2/32) June 10-Year note 131-9/32 (-20/32) Change vs Current Nyk yield Three-month bills 0.04 (-0.01) 0.041 Six-month bills 0.08 (unch) 0.081 Two-year note 99-25/32 (-) 0.242 Five-year note 98-24/32 (-10/32) 0.884 10-year note 97-19/32 (-25/32) 2.017 30-year bond 93-24/32 (-1-10/32) 3.202 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 14.75 (+0.25) U.S. 3-year dollar swap spread 13.50 (unch) U.S. 5-year dollar swap spread 16.25 (+0.25) U.S. 10-year dollar swap spread 13.50 (+1.00) U.S. 30-year dollar swap spread -7.75 (+1.50))
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