Treasuries pare drop as Bernanke says more accommodation needed

March 26 (Bloomberg) -- Treasuries pared their first losses in five days after Federal Reserve Chairman Ben S. Bernanke said continued accommodative monetary policy will be needed to make further progress reducing unemployment.

U.S. 10-year notes headed for their biggest monthly drop in more than a year as the Treasury prepared to sell $35 billion of two-year notes tomorrow, the same amount of five-year debt the next day and $29 billion of seven-year securities on March 29. German business confidence unexpectedly rose to an eight-month high, an Ifo institute report showed.

“If the chairman keeps on being pretty dovish, you have to increase the possibility of additional easing action,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that trade with the Fed, said in a telephone interview. “They need to make sure that they don’t just pull the carpet out from underneath the recovery.

Yields on 10-year notes rose two basis points, or 0.2 percentage point, to 2.26% at 10 a.m. New York time, according to Bloomberg Bond Trader prices. The yield had increased to as high as 2.29% . The 2% securities maturing in February 2022 fell 6/32, or $1.88 per $1,000 face amount, to 97 24/32.

Yields climbed to almost five-month highs earlier this month after the Fed on March 13 updated its economic outlook, reducing bets it will buy more debt under its quantitative easing program.

Steepest Since 2010

Benchmark 10-year yields are up 29 basis points since the end of February in what would be their steepest monthly increase since December 2010.

Yields on 30-year bonds rose as much as six basis points today to 3.37% before trading at 3.35% , up four basis points.

“Further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” Bernanke said in a speech today in Arlington, Virginia.

The central bank bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 to June 2011 to spur growth. It reiterated on March 13 a pledge to keep interest rates at virtually zero through at least late 2014.

“The Fed is still in play,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market was premature to assume that was off the table. There’s some upward pressure on yields as the market prepares for auctions later this week.”

Loss for March

Treasuries have lost 1.1 percent in March, according to Bank of America Merrill Lynch indexes. Mortgage bonds are little changed on speculation that another round of Fed purchases will focus on debt backed by home loans to bolster housing.

German business confidence unexpectedly rose to an eight- month high in March, suggesting Europe’s largest economy will return to growth even as the sovereign debt crisis curbs euro- area demand for its exports.

Treasury yields are “about where we should be,” Credit Suisse’s Jersey said. “We’re not extremely expensive.”

The number of Americans signing contracts to buy previously owned homes held in February near an almost two-year high, a sign that the real estate market may be stabilizing. The index of pending home purchases fell 0.5 percent to 96.5 after a 2 percent increase the prior month, the National Association of Realtors said today in Washington. January’s reading of 97 was the highest since April 2010.

Bloomberg News

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