July 17, 2013 / 7:28 PM / 4 years ago

TREASURIES-U.S. yields fall as Bernanke curbs bond-buying worries

* Benchmark yields fall to lowest in two weeks
    * Bernanke says plan to pare bond purchases not "preset"
    * U.S. housing starts fall on multi-family drop
    * Fed's Beige Book shows modest to moderate U.S. growth


    By Karen Brettell and Richard Leong
    NEW YORK, July 17 (Reuters) - U.S. Treasuries yields hit
their lowest levels in two weeks on Wednesday after Federal
Reserve Chairman Ben Bernanke said there was no committed
timetable for the U.S. central bank to scale back its bond
purchase program.
    While sticking closely to the timeline he first announced
last month that the Fed would halt its current round of bond
buying by mid-2014 when unemployment was projected to be around
7 percent, Bernanke, in highly anticipated testimony before
Congress, went out of his way to stress that nothing was
certain.
    "Our asset purchases depend on economic and financial
developments, but they are by no means on a preset course,"
Bernanke told the U.S. House of Representatives Financial
Services Committee. 
    Treasury yields had soared to 23-month highs after Bernanke
in May raised the possibility the Fed might scale back its
bond-buying program, known as quantitative easing, later this
year.
    Investors who had bet on the Fed to continue to buy
Treasuries and mortgage bonds at its current $85 billion monthly
clip at least into 2014 were caught by surprise and stuck with
the biggest quarterly losses in Treasuries in 2-1/2 years.
    While Bernanke's latest remarks on the economy seemed more
cautious, they were not enough to dash expectations the Fed
would begin to shrink its bond purchases in September.
    "I don't think there's any game-changing information. On the
margin, it's a little more dovish, but the base case hasn't
changed," said Gene Tannuzzo, portfolio manager at Columbia
Management in Minneapolis. "Most likely, tapering will happen in
September."
    Still, Bernanke's remarks led some to think that smaller
bond purchases may instead begin next year and a Fed rate
increase might be months, if not years, after QE3 ends, traders
said.
    "Mainly he's trying to drive home his point that Fed policy
is data dependent and that they are in control of any timing and
pace of any QE tapering," said Michael Lorizio, senior
fixed-income trader at John Hancock Asset Management in Boston.
    Recent data signaled the U.S. economy decelerated in the
second quarter despite further improvement in the housing, auto
and labor sectors. Economists polled recently by Reuters
forecast that gross domestic product slowed to an annualized
rate of 1.6 percent in the March-to-June period, compared with a
1.8 percent rate in the first quarter. 
    The recent jump in mortgage rates to two-year highs caused
some to worry that the housing recovery could derail. On
Wednesday, the Commerce Department reported that U.S. housing
starts in June dropped 9.9 percent, hitting the lowest level
since last August. But the decline reflected a double-digit
plunge in multi-family construction, which analysts say is
volatile on a monthly basis.
    
    "MODEST TO MODERATE" ECONOMIC GROWTH
    The Fed's Beige Book on regional business conditions,
released before Fed policy-makers meet on July 30-31, showed a
modest to moderate pace of economic growth across the country
through early July. 
    "It's aligned with the assessment of what the Fed has been
conveying in recent months. That is the economy is improving
from earlier this year," said Robbert Van Batenburg, direct of
market strategy with Newedge USA LLC in New York.
    Still, the pace of growth remains sluggish, leading many 
investors to expect it will be unlikely the Fed will pare its
bond purchases at a pace that would send yields much higher from
current levels, if at all.
    "Growth is not strong enough for the Fed to draw down
stimulus much later this year," Columbia's Tannuzzo said.
    Benchmark 10-year Treasuries were last up 12/32
in price to yield 2.489 percent, the lowest level since July 3
and down 4.3 basis points on the day. Last week, the 10-year
yield rose to 2.755 percent, the highest level since August
2011, according to Reuters data.
    Medium-term issues were the best performers with the yield
on five-year notes falling 6.1 basis points to 1.311
percent.
    Mortgage-backed securities also fared well. Prices on
30-year 3.5-percent coupon MBS backed by loans guaranteed by
Fannie Mae rose 12/32 with a yield of 3.166
percent, down 9.3 basis points from late on Tuesday. 
     
 
    LOW-RATES FOR A LONG TIME
    Bernanke has also aimed to soothe markets by emphasizing
that the Fed will keep interest rates low for a long time to
come and that it will not sell the debt held on its balance
sheet and will reinvest proceeds in new purchases.
    The Fed views the size of its bond holdings as having a
stimulative impact on the economy by holding yields lower than
they would otherwise be, even if it is no longer buying bonds.
    In the derivatives market, since Bernanke's testimony before
the House panel, short-term rates futures implied that traders
pushed back their expectations of a Fed rate increase to
December 2014 from October 2014 on Tuesday.

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