Bonds Yields Steady after Bernanke Reassurance

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U.S. Treasuries were steady on Tuesday, keeping yields at one-month lows, as remarks by Federal Reserve Chairman Ben Bernanke reassured the market the Fed would keep buying bonds and worry about the euro zone and U.S. spending cuts fed a bid for safe-haven U.S. debt.

Bernanke, in congressional testimony, defended the U.S. central bank's bond-buying stimulus, saying its benefits clearly exceeded possible costs.

"Bernanke's commentary showed the Fed chairman wants to continue quantitative easing and keep its general stance of monetary policy accommodation," said Eric Stein, vice president and portfolio manager at Boston-based Eaton Vance Investment Managers.

Bernanke said Fed policymakers were aware of potential risks from their support for the economy, but said the central bank had the tools to retreat from stimulus measures if necessary. The Fed is buying $85 billion in bonds each month and has said it will keep purchasing assets until it sees a substantial improvement in the labor market.

"The market needed to hear something reassuring from Bernanke -- that the Fed was there, was going to provide support, and was nowhere near to backing away. They got that," Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey, said.

The market was little affected by data on consumer confidence and home sales. "The data was nudged to the side because the major issues were the uncertainty created by the Italian election and whether you would have a major risk unwind because of that, and whether you would get some equivocation from Bernanke that would throw fuel on that fire," said Tipp.

Elections, Italian Style

On Monday, Treasuries had rallied, driving down yields, as Italy's elections yielded no clear outcome. Fear of an uncertain political and economic landscape in Europe's third-largest economy inspired a persistent bid for U.S. debt on Tuesday.

"Quite understandably, there's been a little shift to safe assets, U.S. Treasuries being one example," said Andrew Milligan, head of global strategy at Standard Life Investments, with $263.9 billion in assets under management as of September 2012.

"These events in Italy are not an overnight sensation. We're in a prolonged period of uncertainty related to Italy and the euro zone. Earlier, Italian bonds fell on the election results, dragging other peripheral euro zone debt lower. Another support for U.S. Treasuries are planned cuts in U.S. government spending that could further slow already tepid U.S. economic growth.

The across-the-board cuts are set to take effect on Friday, and the White House and Congress appear to have no negotiations under way to avoid them. In his testimony, Bernanke urged lawmakers to avoid the spending cuts, which he warned could combine with earlier tax increases to create a "significant headwind" for the economic recovery.

The U.S. economy braked in the fourth quarter, but is generally forecast to grow about 2 percent or more this year. Unemployment has stayed high. It was 7.9 percent in January. The looming automatic spending cuts "could mean even more constraint on consumer incomes and spending," said Kathy Jones, fixed-income strategist at Charles Schwab.

Less demand could weaken growth and contribute to disinflation, a bearish scenario for riskier assets, but a bullish one for safe-haven bonds whose fixed income translates into more buying power when retail and wholesale prices decline.

The rally of the last few days may, itself, beget more gains for Treasuries as some institutional money managers buy bonds to extend duration by month-end on Thursday, traders said.

After the 10-year Treasury note yield posted its biggest one-day drop since early November on Monday, it rose to 1.87 percent on Tuesday from 1.86 percent late on Monday. After posting its biggest one-day drop since June 1 on Monday, the 30-year bond yield stood at 3.06 percent, unchanged from late on Monday.

The 30-year Treasury's price rose 1/32 on Tuesday after rising nearly two full points on Monday. Strategists called Tuesday's Treasury auction "average." Treasury sold $35 billion in two-year notes on Monday and will sell seven-year notes on Wednesday. The auctions settle on Thursday.