CORRECTED-TREASURIES-Bonds steady as Bernanke reassures

Tue Feb 26, 2013 2:49pm EST

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(In graf 12, corrects Standard Life AUM to $263.9 billion from
$253 billion)
    * Bernanke gives reassurance on Fed's bond purchases
    * Italy uncertainty, looming U.S. spending cuts support
prices
    * Treasury auction deemed "average"

    By Ellen Freilich
    NEW YORK, Feb 26 (Reuters) - 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 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 bond 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.

 (Reporting By Ellen Freilich; Editing by Nick Zieminski and
Leslie Adler)
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