TREASURIES-U.S. bond prices fall on upbeat factory, jobs data
* No ground-breaking policy news from Bernanke testimony
* Weekly U.S. jobless claims fall to lowest since May
* U.S. 10-yr TIPS has positive yield 1st time since 2011
NEW YORK, July 18 (Reuters) - U.S. Treasuries prices fell on Thursday as encouraging data on jobless claims and factory activities supported the view the economy may be strong enough for the Federal Reserve to pare back bond purchases revived the selling in bonds. Fed Chairman Ben Bernanke's second day of testimony before lawmakers about economic monetary policy produced no ground-breaking insights on the timing when it might reduce $85 billion monthly bond-purchase stimulus and subsequent increase in short-term interest rates. Ten-year yields fell to their lowest levels in two weeks after Bernanke told a House of Representatives panel on Wednesday that the Fed's plans to scale back its bond purchases later this year are not set in stone, and still depend on the strength of the economy. He stuck to basically the same message before the Senate Banking Committee on Thursday.
So traders focused on the day's economic data which included the Philadelphia Federal Reserve Bank's index on business activity in the Mid-Atlantic region. This gauge rose to 19.8, its highest level in more than two years and topping economists' forecast of 7.8. "This is an encouraging sign heading into the second half of the year. Looking at June and July, we are seeing an improvement in the manufacturing sector," said Ryan Sweet, a senior economist at Moody's Analytics at West Chester, Pennsylvania. Earlier, the government reported the weekly total initial filings for jobless benefits unexpectedly fell to 334,000 last week, its lowest level since early May.
Improved readings on manufacturing and jobs, together with Bernanke's perceived dovish remarks, propelled the Dow and Standard & Poor's 500 stock indexes to record highs, exerting further selling in Treasuries, analysts said. In the afternoon trading, benchmark 10-year notes last traded 11/32 in price to yield 2.530 percent, up 3.9 basis points from late on Wednesday. The 30-year bond fell 28/32 in price with a yield of 3.631 percent, up 5.4 basis points from Wednesday. The Treasuries market has stabilized after a dramatic selloff that sent 10-year note yields to two-year highs of 2.76 percent on July 8. They jumped by more than a full percentage point from around 1.60 at the beginning of May. "There has been a process of normalization to the market in the last couple of weeks after that capitulation trade," said Jason Rogan, managing director in Treasuries trading at Guggenheim Partners in New York. In an bid to calm investors and reduce market volatility, a number of top Fed officials stressed in speeches after the selloff that the Fed will pull back its purchases slowly and will keep rates anchored near zero for a long time to come. In addition to historic high unemployment, Bernanke and other policy-makers have raised the risk of deflation, a downward price spiral that crippled Japan for a decade, as a factor that would keep Fed to maintain a loose policy stand. Demand for inflation-linked bonds emerged on Thursday when the U.S. Treasury Department sold $15 billion in 10-year Treasury Inflation-Protected Securities (TIPS). The latest 10-year TIPS supply fetched positive yield for the first time in nearly two years. TIPS have stabilized after being one of the worst performers in the recent selloff. Investors had paid a premium to buy TIPS on the expectation that Fed bond purchases would spur higher inflation, but that has not yet happened and inflation is instead running well below the Fed's 2 percent target. Consumer price data on Tuesday showed that prices were stabilizing. The Consumer Price Index (CPI) increased 0.5 percent in June, the largest increase since February, after nudging up 0.1 percent in May, though gasoline prices accounted for about two-thirds of June's rise.