TREASURIES-U.S. yields jump as Bernanke signals less bond buying
* Fed's Bernanke says less bond buying if economic forecasts correct
* Benchmark 10-year yield rises to 15-month high
* Broad market selloff also hammers TIPS, MBS
NEW YORK, June 19 (Reuters) - Benchmark U.S. Treasury yields surged to their highest levels in 15 months on Wednesday as Federal Reserve Chairman Ben Bernanke suggested the U.S. central bank was prepared to reduce bond purchases if its economic outlook proves correct, even though the U.S. economy remained stuck at a sluggish pace. His remarks at a new conference after a central bank policy meeting confirmed traders' deepest worries that the end of near-interest-free money from the Fed might be approaching sooner than they had thought. Fears about less Fed stimulus followed by eventual hikes in short-term interest rates caused a flood of selling in Treasuries, with five-year yields rising to their highest levels since August 2011. "He was definitely more hawkish than I or most people expected. What surprised me most was the Fed really downplayed the recent decline in inflation. I thought that would give them more pause than it did," said Thomas Graff, fixed income portfolio manager at Brown Advisory in Baltimore. Some analysts and traders had held out hopes the recent weakening inflation trend and stagnant wages would cause Bernanke and other central bankers on the Federal Open Market Committee to downplay the likelihood of reduced bond purchases later this year. They also reckoned the market turbulence due to Bernanke's remarks in late May to a congressional panel would lead him to soften his rhetoric on Wednesday. The Fed chairman's remarks last month knocked Wall Street stocks from their record highs and propelled mortgage rates to their highest levels in a year.
While the Fed downgraded its overall outlook on growth and inflation in a forecast released simultaneously with the FOMC policy statement, Bernanke said the Fed would gradually scale back its bond purchases starting later this year if evidence matches its latest projection. "If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year," Bernanke said.
But he drew a sharp distinction between less Fed stimulus and tightening monetary policy. The FOMC repeated that it will not raise interest rates until unemployment hits 6.5 percent or lower, provided that the outlook for inflation stays under 2.5 percent. The jobless rate was 7.6 percent in May. In his news conference, Bernanke made clear that threshold was merely for considering a rate hike, not a trigger for necessarily making one. Earlier, the FOMC issued a statement that it will keep its $85 billion monthly purchases of Treasuries and mortgage-backed securities for now. But the policy-setting group made no commitment it will continue at this pace beyond year-end, as some traders had hoped. "The overall message was certainly very hawkish," said Eric Stein, co-director of global fixed income at Eaton Vance Management in Boston. Benchmark 10-year Treasury notes fell 1-15/32 in price to yield 2.355 percent, up 17 basis points from late on Tuesday. The 10-year yield last traded at these levels in March 2012, according to Reuters data. Accounting for all Treasuries maturities, the seven-year note was the worst performer. Its yield surged nearly 22 basis points for its the biggest one-day rise since December 2010, according to Reuters data. The market selloff worsened an already miserable quarter for bond investors. The iShare exchange-traded funds on long-dated Treasuries posted a loss of 1 percent on the day, bringing its quarter-to-date decline to about 4.8 percent. "I think you're seeing a lot of people getting out of bonds here in a 'get me out' trade," said Jason Rogan, managing director of Treasuries trading with Guggenheim Partners in New York. The market selloff was felt across all bond sectors. Treasury Inflation-Protected Securities erased their earlier outperformance versus regular government debt after the FOMC statement and Bernanke's comments on reduced bond purchases. The price on a 10-year TIPS issue fell to its lowest level since February 2011, according to Tradeweb. The 10-year TIPS yield spread versus regular 10-year Treasuries, which gauges investors' expectations, ended at 2.04 percent after trading as wide as 2.10 percent earlier. In the mortgage-backed securities sector, where the Fed has been buying about $40 billion a month, the yield on 30-year MBS that carry a 3.5-percent coupon and are backed by home loans guaranteed by Fannie Mae jumped 27 basis points to 2.93 percent, the highest level since August.