* Fund managers buy bonds as 10-yr yields test 2 pct yields
* Dovish Fed speakers reduce tapering expectations
* Bernanke testimony on Wednesday seen as key event
* U.S. Fed purchases $3.31 bln medium-term government debt
By Karen Brettell
NEW YORK, May 21 U.S. Treasuries ended stronger
on Tuesday after buyers stepped back in, attracted by higher
yields, and after two voting members of the U.S. Federal Reserve
struck a dovish tone on the economy, reducing expectations that
the U.S. central bank is close to tapering its bond purchases.
Fund managers bought bonds after benchmark 10-year Treasury
yields bumped up against key support levels of 2 percent, at the
same time as mortgage-backed debt staged a dramatic turnaround
to reverse earlier losses.
The switch in sentiment occurred just before St. Louis Fed
President James Bullard took a more dovish tone than he has
previously in a speech in Frankfurt, saying that the U.S.
recovery has been disappointing and that he can not see a good
case for tapering unless inflation increases.
Bullard was followed by similar sentiment from New York Fed
President William Dudley, who said that the economy's ability to
weather lower government spending and higher taxes in the coming
months will be key to the U.S. central bank's decision on
whether to reduce bond purchases.
"The market turned around before the speeches as real money
buying came in," said Tom Tucci, head of treasuries trading at
CIBC in New York.
"Then both commentaries tell you that Bernanke is not going
to tip his hand that he is going to be withdrawing accommodation
tomorrow in his testimony. I think that reinforced what was
already happening," Tucci added.
The comments took center stage ahead of Wednesday's
testimony from Fed Chairman Ben Bernanke, which is being keenly
awaited for any clues on whether the central bank might curb its
bond purchases due to signs of an improving labor market.
Ten-year note yields have surged almost 40 basis points this
month as some traders increase expectations that an improving
economy will lead the Fed to reduce its bond purchases before
the end of the year, sooner than many had expected.
The 10-year notes were last up 4/32 in price to
yield 1.95 percent. The yields have jumped from as low as 1.61
percent on May 1.
Still others see the likelihood of the Fed cutting back on
stimulus as less likely as long as inflation remains subdued,
and the economy stays fragile.
"Bernanke is not likely to give too may clues as to the
timing and pace of changes in purchases. September is when they
are likely to make their first move, though I think it will be
rather modest when they finally do it," said Ira Jersey, an
interest rate strategist at Credit Suisse in New York.
Jersey sees much of this month's yield increases as a
correction of the rally to the 1.61 percent area, when bonds
He sees 10-year yields now falling back to around 1.75
percent in the coming six weeks, noting the risks that
manufacturing data may remain weak and depending on this month's
The Fed bought $3.31 billion in Treasuries that mature from
August 2020 to February 2023 on Tuesday as part of its latest
bond purchase program.
It will buy between $1.25 billion and $1.75 billion in bonds
due from 2036 to 2043 on Wednesday.
Bernanke will testify about the economy before a
congressional panel on Wednesday at 10 a.m. EDT (1400 GMT).
Also on Wednesday, the release of minutes of the Fed's last
policy-setting meeting, on April 30-May 1, may provide further
insights into the Fed's thinking. The minutes are to be released
at 2 p.m. EDT on Wednesday.