US 10-Year Bond Yields Flirt With 2 Percent

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U.S. Treasurys prices were little changed on Tuesday as most investors moved to the sidelines a day ahead of testimony from Federal Reserve Chairman Ben Bernanke, which is being keenly awaited for any clues on whether the central bank might curb its bond purchases due to signs of an improving labor market.

Benchmark yields edged up, flirting with 2 percent, which was their highest level since mid-March, after Wall Street stocks touched new highs and nicked the appeal of low-yielding U.S. government debt.

Bernanke will testify about the economy before a congressional panel on Wednesday at 10 a.m.

"The market has no bids right now. There is no reason to bid it before Bernanke," said Eric Green, global head of rates and currency research and strategy at TD Securities in New York.

Also on Wednesday, the release of minutes of the Fed 's last policy-setting meeting, on April 30-May 1, may provide further insights into the Fed's thinking. The minutes are to be released at 2 p.m. (1900 GMT) on Wednesday.

Treasurys prices on Tuesday came off session highs tied to foreign appetite for longer-dated issues overnight and weaker-than-expected German and British inflation data.

Benchmark 10-year notes last traded 2/32 lower in price, yielding 1.991 percent, up nearly one basis point from late Monday. The 10-year yield earlier touched 1.998 percent, its highest since March 15.

The 30-year bond last traded unchanged at 94-7/32 with a yield of 3.175 percent. The 30-year yield retested its two-month high at 3.201 percent set last week.

Traders remained uneasy about jumping back into bonds, analysts said, with Wall Street stocks hovering near record peaks and speculation over whether the Fed will slow its $85 billion monthly purchases of Treasuries and mortgage-backed securities, a pillar of its current policy aimed to foster economic growth.

US Treasury Yields

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Some Fed policymakers, even those perceived to be moderate or dovish about fighting inflation, seemed open to the U.S. central bank slowing or even stopping bond purchases later this year if evidence shows domestic job growth is on a sustained path.

On Monday, the president of the Chicago Fed, Charles Evans, said he was "open-minded" to slowing the central bank's bond purchases and even pulling the plug on the Fed's third round of quantitative easing, known as QE3, if the improvement in jobs conditions stays on track.

James Bullard, president of the St. Louis Fed and a voting member of the Fed's policy-setting committee this year, said on Tuesday at a lecture in Germany that the U.S. central bank should keep buying bonds, while adjusting the pace of purchases up or down, according to incoming economic data.

William Dudley, president of the New York Fed, was also scheduled to speak on Tuesday, at 1 p.m. (1700 GMT).

Bernanke and Dudley need to assure the market of the Fed's commitment to bond purchases at least into year-end, or else benchmark yields would rise to 2.12 percent, which would be a new peak of the year, TD's Green said.

Amid speculation about the future of QE3, benchmark U.S. bond yields have climbed 30 basis points since the start of May. They also rose in reaction to a better-than-expected April jobs report and a surging dollar.

"The risk for rates is to go materially higher, then materially lower," Green said.

The U.S. central bank bought $3.31 billion in Treasuries that will mature in August 2020 to February 2023, which was its latest purchase for QE3.