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Bonds Fall as Sentiment Grows That Fed to Stop Cutting Rates Soon

Treasury debt prices mostly fell Wednesday as investors interpreted testimony by Federal Reserve Chairman Ben Bernanke as hinting that the central bank may be thinking of ending its round of interest rate cuts.

The weakness in prices was more pronounced on the short end of the Treasury curve, which is more heavily influenced by changes in interest-rate policy, and the yield-curve spread narrowed to its flattest since early February.

While Bernanke told Congress's Joint Economic Committeethat the US economy will not grow much in the first half of 2008 and that a recession is possible, he said monetary and fiscal policies already in place should support a return to growth.

Investors took his remarks as a possible signal that the central bank may back away from further aggressive interest rate cuts to see if recent stepped-up injections into the banking system, along with ramped-up money market operations, might work to free up lending between banks and stimulate the economy.

Bernanke "is boosting confidence generally in the Federal Reserve's handling of monetary affairs overall, and that may translate into a need for less future rate cuts -- that is what the market is saying," said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J.

Benchmark 10-year Treasury notes were trading 13/32 lower in price for a yield of 3.61 percent, compared with 3.56 percent late Tuesday. Bond yields move inversely to prices.

Two-year notes were trading 8/32 lower in price for a yield of 1.94 percent, the highest yield level since late February, up from 1.80 percent late Tuesday.

The 30-year bond rose 7/32 in price for a yield of 4.39 percent, down from 4.40 percent. Long bond prices were boosted by the expectation that a retreat from monetary loosening could lower inflation expectations. Inflation erodes the value of a bond over time.

The spread on yield between two-year notes and 10-year notes narrowed to 167 basis points Wednesday, making that spread the narrowest and the Treasury curve the flattest since early February.

"The curve-flattening trade seems to be the path of least resistance," said Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley in New York.

Bonds began the day on a weak note after a surprise increase in private employment for March prompted investors to pare expectations for a huge dip in non-farm payrolls when the government figure is released on Friday.

ADP Employer Services said private-sector employers added 8,000 jobs last month. Economists on average had been forecasting the ADP report to show 48,000 jobs were cut.

The report added some optimism to counter the gloomy expectations ahead of the March non-farm payrolls data. The median of forecasts from analysts is for employers to have cut payrolls for a third straight month in March, eliminating 60,000 jobs after cutting 63,000 non-farm payrolls in February.

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