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Bill Gross says, time to buy 5-7 year Treasurys

Scott Eells | Bloomberg | Getty Images

Federal Reserve Chairman Ben Bernanke's semi-annual testimony on Wednesday drew swift advice from bond guru Bill Gross: time to buy five to seven-year Treasurys since interest rates are likely to be on hold for some time.

"Focus on the policy rate… Focus on the policy rate… Focus on the policy rate…Buy 5-7 [year] Treasurys," Gross, who heads fixed-income giant Pimco, tweeted late Wednesday after Bernanke told the U.S. Congress that there was no committed timetable to scaling back the Fed's $85 billion-a-month bond-buying program.

(Read More: Bernanke: Fed to begin tapering purchases later this year)


The U.S. Treasury market responded to Bernanke's comments with relief. The benchmark 10-year yields hit a two-week low of 2.46 percent on Wednesday and the five-year bond yield fell to 1.28 percent, its lowest level in about a month.

The bond market has been hit hard by fears that the Fed could start to unwind its monetary stimulus sooner rather than later and yields spiked higher after comments from Bernanke in May raised the possibility of the central bank scaling back its bond buying program later this year.

(Read More: Pimco total return fund adds Treasurys in tumultuous June)

According to the tweets by Gross, even if the Fed starts to take back its quantitative easing, it's the level of the Fed's main policy rate that is key and that's likely to be on hold until 2016. The Fed's main lending rate is currently at 0.25 percent.

"The bond market has not moved to the point where it thinks [interest] rates will rise. We've seen Fed speakers say that the front-end [of the yield curve] has overreacted and I think they are more comfortable with where yields are now," Will Oswald, global head of fixed income, currencies and commodities at Standard Chartered Bank, told CNBC Asia's "Squawk Box."

The benchmark 10-year Treasury yield is down about 28 basis points from a peak hit earlier this month at almost 2.76 percent.

Still, analysts said they were not ruling out further volatility in the bond market, which was likely to remain sensitive to any signs of change in the Fed's bond-purchasing program.

"What Bernanke is doing is managing expectations in the bond market and the equity markets," said Kumar Palghat, managing director at Kapstream Capital.

"They don't have a pre-set course they are going to take and I think markets are going to be volatile for the next 12-18 months. The next reaction, which could come at the September Fed meeting, is that that Treasury yields go higher from here," he added.

(Read More: Bond yields getting closer to pain threshold)

Palghat said if economic data comes in strong or inflation picks up, worries about the Fed tapering sooner rather than later could come back to hurt the Treasury market.

"If you have to pick stocks versus bonds, I would pick stocks because we know the Fed will exit. If you stay in bonds I think you have to be very nimble to survive and get through this period of when the Fed might exit," he said.

— By CNBC's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC