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Short-term Bonds Rise on Bernanke Remarks

Reuters
Thursday, 10 Jan 2008 | 2:50 PM ET

Short-dated Treasury debt prices rose Thursday after Federal Reserve Chairman Ben Bernanke's remarks solidified expectations the Fed would aggressively pare interest rates to forestall a recession.

.S. 30-year Treasury bonds fell to session lows as investors pursued a curve-steepening trade in which the gap between shorter-dated note yields and longer-date bond yields is widened.

The 30-year bond was trading 1-24/32 lower in price for a yield of 4.44 percent from 4.34 percent late Wednesday.

Investors already had been banking on the Fed cutting rates by an aggressive half point at its meeting later this month, but Bernanke's remarks spurred them to increase bets in that direction.

"He's (Bernanke) going to give what the market wants in light of these remarks," said Anne Ruff, portfolio manager at Rydex Investments in Rockville, Md.

U.S. interest rate futures implied traders see a 90 percent chance of a half-point interest rate cut in late January, up from 68 percent prior to Bernanke comments.

The price on two-year notes, which are highly sensitive to changing views on Fed policy, reached a session high at 101-4/32, up 4/32 and more than erasing an earlier 3/32 decline. The yield, which moves inversely with price, slipped 4 basis points to 2.67 percent, the lowest level since March 2004, after Bernanke's remarks.

Rising Growth Risks

A deepening housing and mortgage crisis, together with wild swings in the financial markets and $100-a-barrel oil, have led the Fed to downgrade its view on U.S. growth and to prepare to lower interest rates further in the coming months.

"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said in remarks to a housing and finance group. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."

Bernanke's comments spurred bets that short-dated Treasuries will outperform longer-dated issues, sending the two-year to 10-year area of the yield curve to its steepest level since late 2004, traders said.

The 10-year yield was 3.84 percent, up 2 basis points from late Wednesday, while the 30-year yield rose 6 basis points to 4.40 percent.

Bernanke's views echoed those in speeches by several Fed officials earlier this week, reinforcing expectations that the central bank might slash the federal funds rate by an aggressive half a percentage point after its Jan. 29-30 meeting.

Bernanke's speech, before the the Women in Housing and Finance and Exchequer Club, was released early after a news agency broke the 1 p.m. embargo by nearly 45 minutes.

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