TREASURIES-U.S. yields fall as Bernanke talks down bond-buying worries
* Benchmark yields fall to lowest in two weeks * Bernanke says plan to pare bond purchases not "preset" * U.S. housing starts fall on multi-family drop * Fed's Beige Book on regional economic conditions on tap By Karen Brettell and Richard Leong NEW YORK, July 17 (Reuters) - U.S. Treasuries yields hit their lowest levels in two weeks on Wednesday after Federal Reserve Chairman Ben Bernanke said there was no committed timetable for the U.S. central bank to scale back its bond purchase program. While sticking closely to the timeline he first announced last month that the Fed would halt its current round of bond buying by mid-2014 when unemployment was projected to be around 7 percent, Bernanke, in highly anticipated testimony before Congress, went out of his way to stress that nothing was certain. "Our asset purchases depend on economic and financial developments, but they are by no means on a preset course," Bernanke told the U.S. House of Representatives Financial Services Committee. Treasury yields had soared to 23-month highs after Bernanke in May telegraphed the possibility the Fed might scale back its bond buying program, known as quantitative easing, later this year. Investors who had bet on the Fed to continue to buy Treasuries and mortgage-backed securities at its current $85 billion monthly clip at least into 2014 were caught by surprise and stuck with the biggest quarterly losses in Treasuries in 2-1/2 years. While Bernanke's latest remarks on the economy seemed more cautious, they were not enough to dash expectations the Fed would begin to shrink its bond purchases in September. "I don't think there's any game-changing information. On the margin, it's a little more dovish, but the base case hasn't changed," said Gene Tannuzzo, portfolio manager at Columbia Management in Minneapolis. "Most likely, tapering will happen in September." Still, Bernanke's remarks led some to think that a reduction in bond purchases may instead begin next year and a Fed rate hike might be months, if not years, after QE3 ends, analysts and traders said. "Mainly he's trying to drive home his point that Fed policy is data dependent and that they are in control of any timing and pace of any QE tapering," said Michael Lorizio, senior fixed-income trader at John Hancock Asset Management in Boston. Recent data signaled the U.S. economy decelerated in the second quarter despite further improvement in the housing, auto and labor sectors. Economists polled recently by Reuters forecast that gross domestic product slowed to an annualized rate of 1.6 percent in the March-to-June period, compared with a 1.8 percent rate in the first quarter. The recent jump in mortgage rates to two-year highs caused some to worry that the housing recovery could derail. On Wednesday, the Commerce Department reported that U.S. housing starts in June dropped 9.9 percent, hitting the lowest level since last August. But the decline reflected a double-digit plunge in multi-family construction, which analysts say is volatile on a monthly basis. Investors will receive the Fed's Beige Book on regional economic conditions at 2 p.m. (1800 GMT), which Fed policy-makers will incorporate during their discussion at their next meeting on July 30-31. Given the sluggish pace of U.S. growth, the Fed will unlikely pare its bond purchases at a pace that would send yields much higher from current levels, if at all, investors said. "Growth is not strong enough for the Fed to draw down stimulus much later this year," Columbia's Tannuzzo said. Benchmark 10-year Treasuries were last up 10/32 in price to yield 2.493 percent, the lowest level since July 3 and down 3.9 basis points on the day. Last week, the 10-year yield rose to 2.755 percent, the highest level since August 2011, according to Reuters data. LOW-RATES FOR A LONG TIME Bernanke has also aimed to soothe markets by emphasizing that the Fed will keep interest rates low for a long time to come and that it will not sell the debt held on its balance sheet and will reinvest proceeds in new purchases. The Fed views the size of its bond holdings as having a stimulative impact on the economy by holding yields lower than they would otherwise be, even if the Fed is no longer purchasing bonds. In the derivatives market, since Bernanke's testimony before the House panel, short-term rates futures implied that traders pushed back their expectations of a Fed rate increase to December 2014 from October 2014 on Tuesday.
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