TREASURIES-Bonds surge as Bernanke warns of bank failures

(Recasts, adds comments, updates prices)

By Pedro Nicolaci da Costa

NEW YORK, Feb 28 (Reuters) - U.S. government bonds rallied
sharply on Thursday after jobless data hinted at recession and
Fed chief Ben Bernanke offered glum testimony in which he
predicted the credit crisis will end in bankruptcy for some
banks.

Revisions to fourth-quarter economic growth showed the
Federal Reserve chairman had plenty of reason to be
pessimistic, with gross domestic product eking out a meager 0.6
percent increase.

But Bernanke's comments on banks sent stocks sharply lower,
adding further impetus to bonds. He did say the banking sector
as a whole was solid, yet warned some smaller institutions
might go under.

In an environment of growing mistrust about which banks are
best positioned to weather the crisis, his statement struck a
nerve, sending benchmark 10-year notes US10YT=RR up 1-13/32
in price for a yield of 3.68 percent. Yields were down 18 basis
points, the biggest one-day decline since December.

"People seemed to focus on Bernanke's line that while large
banks are well capitalized, some of the smaller banks may
fail," said Andrew Brenner, a market analyst at MF Global.

Jobless claims figures were hard to ignore too. They had
been trending consistently higher in recent months, and
continuing claims were at their highest level since the
aftermath of Hurricane Katrina, which boosted unemployment.

Meanwhile, Freddie Mac reported a much larger-than-expected
loss and Thornburg Mortgage Inc said it faced $2.9 billion in
margin calls, lifting Treasuries across the yield curve.

Commodities continued to soar, with oil prices rising to a
record high above $102 a barrel and gold climbing to fresh
peaks.

Bernanke acknowledged this might eventually complicate the
Fed's task of pushing interest rates lower to dampen the
effects of a housing slump, but inflation fears did not seem to
be concerning bond traders for the moment.

The 30-year bond, the maturity most sensitive to price
pressures, rose more than two full points on the day.

In the end, Bernanke's message was clear: the Fed will err
on the side of doing too much, an implicit guarantee to
investors that the Fed has their back.

But this backing did not seem enough to encourage any risk
taking, with major stock indexes falling nearly 1 percent.
(Reporting by Pedro Nicolaci da Costa; Editing by Dan
Grebler)