Treasuries Fall as Bernanke Comments Fuel Inflation Bets

Treasury 30-year bond yields rose the most in a week as Federal Reserve Chairman Ben S. Bernanke said continued accommodative policy will be needed to reduce unemployment further, boosting bets inflation will accelerate.

U.S. government notes were little changed before the Treasury auctions $35 billion of two-year securities tomorrow, the same amount of five-year debt on the following day and $29 billion of seven-year notes on March 29. The number of Americans signing contracts to buy previously owned homes held near an almost two-year high.

“One could make the argument that the chairman’s remarks this morning could be construed as inflationary,” Richard Bryant, senior vice president in fixed income at Mizuho Securities USA Inc. in New York, one of the 21 primary dealers that trade with the Fed, said in a telephone interview. “The chairman’s comments this morning make it clear he’s going to hold his ground.”

Yields on 30-year bonds rose three basis points, or 0.03 percentage point, to 3.34 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The yields gained as much as seven basis points, the biggest intraday advance since March 19. The 3.125 percent securities due in February 2042 fell 20/32, or $6.25 per $1,000 face amount, to 95 30/32.

The long-bond yields reached above their 200-day moving average of 3.33 percent, after declining below it on March 23 and exceeding it on March 14. Rising above or falling below a moving average usually indicates a move in that direction may continue.

Ten-Year Yields

Yields on 10-year notes rose two basis points to 2.25 percent. They have increased 28 basis points in March, the most since December 2010.

Volatility eased for a fourth day. Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options, fell to 85.6. It reached 93.3 on March 20, the highest level this year. The volume of Treasury trades fell to $159 billion, the lowest since Jan. 9, according to London-based ICAP Plc, the biggest broker between banks.

“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 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.

Fed Speakers

“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 the primary dealer Credit Suisse Group AG, said today in a telephone interview. “They need to make sure that they don’t just pull the carpet out from underneath the recovery.”

Seven central-bank officials are scheduled to make remarks tomorrow, including New York Fed President William Dudley, Dallas Fed President Richard Fisher and Governor Elizabeth Duke.

“Everyone’s trying to read tea leaves,” said Russ Certo, managing director of rates trading at Gleacher & Co. in New York. “They’re anticipating at this juncture that you could get friendlier commentary out of the Fed going forward.”

U.S. government securities tumbled earlier this month, pushing 10-year yields to almost five-month highs, after the Fed upgraded its economic outlook on March 13, reducing bets it will buy more debt under quantitative easing. Bonds rose last week as data showing slower growth in China and Europe and an uneven recovery in U.S. housing rekindled Treasuries’ refuge appeal.

Sluggish Growth

The Treasuries market shows the economy is unlikely to maintain its strength without help from the U.S. central bank. Everything from derivatives to mortgage securities indicates that investors don’t expect a repeat of the bear markets seen in 1994 and 2009, two of the worst years ever for bonds.

Declining unemployment, rising consumer confidence and strength in manufacturing may give way to more sluggish growth as George W. Bush-era tax breaks end and $1 trillion of mandatory federal budget cuts kick in. The Fed’s preferred measure of gauging the outlook for inflation shows consumer prices will rise at half the pace of 2008, when it accelerated to 5.6 percent.

The five-year, five-year forward break-even rate, which projects the pace of consumer price increases starting in 2017, ended last week at 2.73 percent. While the measure, which the Fed prefers to look at in determining inflation expectations and monetary policy, is up from this year’s low of 2.37 percent on March 5, it’s in line with the average over the past decade.

Yield Curve

The yield gap between 10- and 30-year Treasuries, known as the yield curve, also suggests less concern about rising inflation. It has fallen to 109 basis points, compared with a high this year of 120 basis points. The gap typically widens when traders are concerned inflation will accelerate because investors demand more compensation to lower long-term bonds.

Treasuries have lost 1.4 percent this year, dropping the most in three months since the fourth quarter of 2010, according to Bank of America Merrill Lynch indexes.

Five-year notes may rise, pushing yields to 0.96 percent if they fall lower than 1.06 percent, the neckline needed to form a head-and-shoulders pattern, according to CRT Capital Group LLC.

The potential for a bullish shift in technical patterns is also supported by the 14-day relative-strength index, said David Ader, head of U.S. government bond strategy at CRT in Stamford, Connecticut. The index for five-year notes advanced to 77.18 on March 20, with levels above 70 or below 30 indicating the price of a security may be poised to reverse direction.

Five-year yields declined less than one basis point today to 1.08 percent.

Sovereign Debt

Morgan Stanley Smith Barney recommended investors reduce their holdings of developed-market sovereign debt, stocks, high-yield bonds, equities and commodities to less than that of their benchmark index, or “underweight” the securities, amid “the lack of policy response to the recession in Europe and subpar U.S. growth,” the unit of New York-based Morgan Stanley said in a report.

The Fed sold $8.6 billion today of Treasuries due from February 2013 to July 2013 as part of its program to replace $400 billion of short-term debt in its holdings with longer-term Treasuries in an effort to reduce borrowing costs further.

Treasuries remained lower today as an index of the number of Americans signing contracts to buy previously owned homes held in February slipped 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.