* Bernanke suggests timetable for reduced bond purchases
* U.S. stocks fall more than 1 percent
* Treasury bond prices drop, 10-yr yield at 15-month high
By Leah Schnurr
NEW YORK, June 19 Stocks tumbled and benchmark
Treasury bonds rose to yields not seen since March 2012 on
Wednesday after Ben Bernanke laid out a blueprint for the
wind-down of the Federal Reserve's bond-buying program that has
bolstered risky assets.
Bernanke's comments were more explicit than markets
expected. He said the Fed's policy-setting committee will begin
to pull back on purchases later this year if the economy grows
as expected, with the eventual goal of ending the program by the
middle of 2014.
Bernanke was careful to say that should economic conditions
change, the Fed could hold off on a pullback in its purchases of
$85 billion in bonds per month. However, the tone of his
remarks, along with more optimistic official forecasts from the
Fed, sent investors to the exits.
"These hawkish statements really sent both the equity market
and the bond market into a tailspin," said Paul Montaquila, a
fixed income investment officer with Bank of the West and BNP
Paribas Securities Corporation.
"I don't think the markets expected such a positive spin on
Bond prices were hardest-hit, with both 10-year and 30-year
Treasury bonds falling more than 1 point in price. The 10-year's
yield rose to 2.33 percent, the highest since March 2012. Equity
markets lost more than 1 percent following the comments, while
the dollar rallied, as higher interest rates increase the appeal
of U.S. assets to foreign investors.
The dollar jumped sharply against the euro and yen. The U.S.
currency was up 1.2 percent at 96.44 yen. The euro
last traded at $1.3280, down 0.8 percent. Gold was lower.
The MSCI world equity index lost 1.1
The Fed's quantitative easing program, known as QE, has been
key to the rally this year, helping push the benchmark S&P 500
up about 15 percent.
Some investors had speculated the Fed might backpedal from
talk of cooling the pace of the bond purchase program, after
comments from Bernanke last month threw a wrench in the equity
rally and pushed Treasuries yields higher.
Investors across assets have built up trades around the
Fed's stimulus program, using low-yielding Treasury debt as a
source of borrowing for bets in riskier markets. Those bets
become less profitable when Treasury market volatility increases
as it has of late.
Since May 22, when Bernanke first addressed the idea of
cutting bond purchases in the near-term, markets have seen an
increase in volatility that is likely to continue. This has been
evident in the sharp daily moves in markets such as Japanese
stocks or emerging-markets currencies.
"When people put on these highly marginal or low conviction
trades simply because of policy ... when they are unwound, you
get dislocations that can be painful," said Michael O'Rourke,
chief market strategist at JonesTrading in Greenwich,
"It's better (the Fed) at least slows the policy down or
gives the test for the policy wind-down as he's done today, and
it will get some people to start unwinding those trades. The
market will hopefully start correcting quicker on its own
without something more violent later."
The Dow Jones industrial average dropped 206.04
points, or 1.35 percent, to end at 15,112.19. The Standard &
Poor's 500 Index fell 22.88 points, or 1.39 percent, to
1,628.93. The Nasdaq Composite Index gave up 38.98
points, or 1.12 percent, at 3,443.20.
Benchmark 10-year Treasuries were last off
1-6/32 in price to yield 2.33 percent. The 30-year bond
was 31/32 lower in price to yield 3.398 percent.
The slight upgrade to the Fed's economic projections also
meant investors were gauging when interest rates could be
"The forecasts suggested that the unemployment rate will
fall to 6.5 percent in 2014, which means that the Fed could hike
rates sooner than expected, possibly as early as the first
quarter of 2015," said Camilla Sutton, chief currency strategist
at Scotia Capital in Toronto. "And that's positive for the U.S.
The Fed has said it will keep rates at ultra-levels until
the unemployment rate drops to at least 6.5 percent as long as
inflation stays close to the Fed's 2 percent target.
Gold fell to a one-month low, with spot gold down 1.3
percent to $1,349.86 an ounce, the lowest since May 20.
Oil also fell after the Bernanke press conference. The
front-month Brent contract was down 43 cents to $105.59,
while U.S. crude fell 51 cents to $97.93.