* Traders tweak positions ahead of Bernanke remarks
* TIPS fare well after stronger-than-expected CPI
* Fed's George wants to shrink QE3 right away
* Fed buys $1.46 billion in bonds due 2036-2043
By Karen Brettell and Richard Leong
NEW YORK, July 16 U.S. Treasuries prices were a
tad higher on Tuesday in advance of testimony before Congress
from Federal Reserve Chairman Ben Bernanke which might offer
clues on whether the U.S. central bank might reduce its bond
purchases later this year.
Bond buying was mild on below-average volume as traders
sought to tweak their positions in anticipation of possible wild
market swings from Bernanke's remarks on Wednesday, analysts
The bond market was battered for about seven weeks after
Bernanke hinted the central bank would consider paring its $85
billion of monthly purchases of Treasuries and mortgage-backed
securities if the economic recovery continues its momentum.
Benchmark yields rose to near two-year highs last week on
worries the era of ultra-loose monetary policy was coming to
end, although Bernanke and most Fed policy-makers have assured
they plan to leave short-term interest rates near zero for a
protracted period even if the Fed stops buying bonds.
In the wake of those Fed comments and some
weaker-than-expected data, bond yields have retreated from those
peaks as bargain-minded investors stepped in and traders bought
Treasuries to exit earlier short positions, analysts said.
"The market has been whipsawed a lot lately and it's waiting
for the chairman and whether he validates the idea about
reducing stimulus. He has a tough job." said Robert Tipp, chief
investment strategist at Prudential Financial in Newark, New
Bernanke is expected to reiterate at the two-day testimony
before Congress, which begins on Wednesday, that the Fed will
remain accommodative by holding rates low for a long time, even
after it reduces stimulus by stopping bonds.
Bernanke's testimony will be released at 8:30 a.m. (1230
GMT) on Wednesday.
The consensus on Wall Street is the Fed will likely begin to
scale back its monthly bond purchases in September. It will hold
a two-day policy meeting at the end of July, then will meet
again Sept. 17-18.
The Fed bought $1.46 billion in bonds due 2036 through 2043
on Tuesday as part of its ongoing purchase program.
"I think the central banks would like to get out of the
bond-buying business and the way they are going to get out of it
is by giving forward guidance that they are going to be
extremely easy in the front end for a long period of time, which
will anchor rates lower overall," said Tom Tucci, head of
Treasuries trading at CIBC in New York.
On Tuesday, Kansas City Fed President Esther George told Fox
Business television the Fed should start paring its bond
purchase program, known as quantitative easing or QE3, right
In the cash market, 10-year Treasury notes last
traded 3/32 higher in price with a yield of 2.532 percent, down
1.1 basis points and below the 2.755 percent set last Monday.
The 10-year yield has risen nearly 1 percentage point since the
beginning of May, according to Reuters data.
On the Chicago Board of Trade, short-term interest rates
implied traders factored in a 53 percent chance the Fed might
raise rates at the end of 2014, slightly higher than a month
earlier, before the June 18-19 Fed policy meeting.
Improving inflation data on Tuesday may bolster the case for
less Fed stimulus after an earlier string of weak price
readings raised the risk of deflation, which the Fed has also
sought to avert through quantitative easing.
The central bank, however, has downplayed concerns over
falling inflation as temporary, saying it expects price
pressures to rise back to its 2 percent target.
The Labor Department said on Tuesday its Consumer Price
Index increased 0.5 percent in June, the largest increase since
February, after nudging up 0.1 percent in May, though gasoline
prices accounted for about two thirds of that.
"A lot of the categories of CPI follow the Fed's script to a
large extent," including an increase in medical inflation, said
Aaron Kohli, an interest rate strategist at BNP Paribas in New
York. "The bounce back was very strong and I think that adds to
their thesis that a lot of the softness is transitory."
The rebound in price growth boosted Treasury Inflation
Protected Securities, which were hammered during the May-June
bond market selloff.
The yield spread between 10-year TIPS and regular 10-year
Treasuries grew to 2.12 percent, its widest
level in about five weeks.
The U.S. Treasury will sell $15 billion in a new 10-year
TIPS issue on Thursday.