(Corrects in last graph, jobless claims lowest in two months,
* Yields rise after Philly Fed index beats expectations
* Investors focused on Bernanke testimony for QE clues
* Treasury to sell $15 billion in 10-year TIPS
By Karen Brettell
NEW YORK, July 18 U.S. Treasuries yields rose on
Thursday after data showed factory activity in the mid-Atlantic
region expanded in July at its highest pace since March 2011, an
indication the economy may be strong enough for the Federal
Reserve to reduce bond purchases.
Investors focused on Fed Chairman Ben Bernanke's second day
of testimony about monetary policy before a congressional
committee, hoping for any new clues when the U.S. central bank
will begin reducing its $85 billion a month in bond purchases.
Ten-year yields fell to their lowest levels in two weeks
after Bernanke told a House of Representatives panel on
Wednesday that the Fed's plans to scale back its bond purchases
later this year are not set in stone, and still depend on the
strength of the economy.
The strong U.S. data sent yields back higher on Thursday.
The Philadelphia Federal Reserve Bank said its business activity
index rose to 19.8 from 12.5 in June, far exceeding economists'
expectations for a reading of 7.8.
"This is an encouraging sign heading into the second half of
the year. Looking at June and July, we are seeing an improvement
in the manufacturing sector," said Ryan Sweet, a senior
economist at Moody's Analytics at West Chester, Pennsylvania.
Benchmark 10-year notes were last down 10/32 in
price to yield 2.53 percent, up from 2.49 percent late on
Members of the Senate Banking Committee will now have the
opportunity to grill Bernanke.
"We'll have to see if any questions are specifically
targeted towards tapering and the exit strategy of the Fed
towards the latest QE," said Jason Rogan, managing director in
Treasuries trading at Guggenheim Partners in New York.
Treasuries have stabilized after a dramatic selloff that
sent 10-year note yields to two-year highs of 2.76 percent on
July 8. They jumped by more than a full percentage point from
around 1.60 at the beginning of May.
"There has been a process of normalization to the market in
the last couple of weeks after that capitulation trade," Rogan
In an effort to soothe investors and reduce market
volatility, a number of top Fed officials stressed in speeches
after the selloff that the Fed will pull back its purchases
slowly and will keep rates anchored at record low levels for a
long time to come.
"I think the markets are beginning to understand our
message," Bernanke said on Wednesday.
Demand for inflation-linked bonds will be tested later on
Thursday when the Treasury auctions $15 billion in 10-year
Treasury Inflation-Protected Securities (TIPS).
TIPS have stabilized after being one of the worst performers
in the recent selloff. Investors had paid a premium to buy TIPS
on the expectation that Fed bond purchases would spur higher
inflation, but that hasn't yet happened and inflation is instead
running well below the Fed's 2 percent target.
Consumer price data on Tuesday showed that prices were
stabilizing. The Consumer Price Index (CPI) 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 June's rise.
Treasuries had little reaction to data that the number of
Americans filing new claims for jobless benefits dropped more
than expected last week to its lowest level in two months.
(Additional reporting by Richard Leong; Editing by Kenneth