Treasury yields trade near 3-week lows on Bernanke pledge

Treasury 10-year note yields traded at almost a three-week low as Federal Reserve Chairman Ben S. Bernanke said inflation would remain in check as he renewed a pledge to sustain stimulus after the U.S. expansion gains strength.

Benchmark 10-year yields extended earlier declines as data indicating slower growth in Europe and Asia bolstered demand for the safety of U.S. government debt. They briefly rose after the Institute for Supply Management’s U.S. factory index showed growth for the first time since May. The Fed purchased $4.8 billion in Treasuries as part of its Operation Twist program.

“Even with today’s ISM, there’s still any number of significant headwinds we have to go through before you can say the coast is clear,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade with the Fed. “It will be difficult for Treasuries to find a different trajectory than what we’ve seen over the last several weeks.”

The benchmark 10-year note yield fell two basis points, or 0.02 percentage point, to 1.61 percent as of 4:20 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent security due in August 2022 fell 5/32, or $1.56 per $1,000 face value, to 100 3/32. The yield, which dropped 12 basis points last week, fell to 1.60 percent on Sept. 28, the lowest level since Sept. 7.

The yield on the 30-year bond declined two basis points to 2.81 percent.

Bernanke Speaks

Five years of low interest-rate policies “have not led to increased inflation,” and the public’s expectations for price gains “remain quite stable,” Bernanke told the Economic Club of Indiana. Fed officials have the necessary tools to tighten when needed to prevent “inflationary pressures down the road,” he said.

Policy makers’ forecast to hold the main interest rate close to zero until at least mid-2015 “doesn’t mean that we expect the economy to be weak through” that year, the Fed chief said.

A gauge of U.S. manufacturing rose to 51.5 in September from 49.6 a month earlier, the Tempe, Arizona-based group said today. Economists had forecast a rise to 49.7.

“We’re still in a stall-speed, low-growth trajectory,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., a primary dealer. “We’re not really changing our view on manufacturing.”

Fed Bank of San Francisco President John Williams said the U.S. economy and financial markets still face “severe challenges” in the aftermath of the 2007-2009 recession.

Treasuries returned 2.3 percent this year, according to Bank of America Merrill Lynch indexes. The securities returned 1.1 percent in the past two weeks of September, leaving them down 0.3 percent for the month.

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