(Corrects Bernanke's comments in the third paragraph to say
tapering is possible in the next few FOMC meetings, not probably
* Benchmark yields jump above 2 percent on Bernanke's QE
* Fed buys $1.25 bln in long-dated Treasuries
* Jobless claims data on Thursday in focus
By Karen Brettell
NEW YORK, May 22 U.S. Treasury yields on the
benchmark 10-year note rose above the key two percent level on
Wednesday, the highest level in two months, as Federal Reserve
Chairman Ben Bernanke added to bond investor fears that the U.S.
central bank might slow its bond purchases later this year if
the economy improves further.
Bernanke initially delivered what bond bulls had hoped for
following dovish remarks from two top Fed officials on Tuesday,
telling federal lawmakers in prepared remarks the Fed's current
policy has produced significant benefits and cautioning that a
premature pullback would hurt the economy. These remarks lifted
bond prices to session highs in early trading.
A half hour later, however, the bond market's gains swiftly
evaporated when Bernanke said during a question and answer
session that tapering of the Fed's bond purchases was possible
in the next few meetings if data show U.S. growth is on a
"He made the statement that they could taper in the next
three meetings and everybody got caught," said Charles Comiskey,
head of Treasuries trading at Bank of Nova Scotia in New York.
"The dislocations were everywhere, then the selling came in.
Then it just cascaded."
Benchmark 10-year Treasuries were last down
27/32 in price to yield 2.02 percent, up from a low of 1.89
percent immediately after Bernanke's speech.
Thirty-year bonds fell 1-15/32 in price to yield
3.21 percent, up from a low of 3.13 percent earlier on
Speculation has intensified as to whether the Fed might
reduce its third round of large-scale asset purchases, known as
quantitative easing or QE3, ever since a better-than-expected
April jobs report earlier this month.
"If we see continued improvement and we have confidence that
that's going to be sustained, then we could in the next few
meetings, we could take a step down in our pace of purchases,"
Bernanke said during the question-and-answer portion of his
testimony before the congressional Joint Economic Committee
added to this speculation.
"His prepared remarks were dovish, but some people were
obviously surprised by his tapering comment during the Q&A,"
said Kathy Jones, fixed-income strategist at Charles Schwab in
Treasuries held their losses even after minutes from the
Fed's meeting on April 30-May 1 held a dovish tone. The minutes
showed that many Fed officials want to see more evident that the
economy is recovery before tapering bond purchases.
Fed policymakers will meet next on June 18-19.
Treasuries investors are now likely to be even more
responsive to economic data points as they come out, likely
adding volatility to the market and holding 10-year notes over
the 2 percent level for now, said Comiskey.
"We're going to start living day-to-day by the data," he
said, saying that the 2 percent level may now form technical
resistance on 10-year Treasuries yields, which may next rise to
the 2.10 percent to 2.12 percent area.
The next data point will be Thursday's release of initial
jobless claims, which is expected to show that claims for state
unemployment benefits fell to 345,000 from 360,000 last week,
according to the median estimate of economists polled by
The Fed bought $1.25 billion in bonds due from 2036 to 2043
on Wednesday as part of its ongoing purchase program.
It will buy between $3 billion and $3.75 billion in notes
due 2019 and 2020 on Thursday.
The Fed's balance sheet has ballooned to $3.3 trillion as of
May 15 as its Treasuries holdings have more than quadrupled
since it adopted quantitative easing in late 2008 to $1.86
Its ownership of mortgage-backed securities totaled $1.15
trillion last week, compared with none in September 2008, just
before the collapse of Lehman Brothers amid the global financial
(Additional reporting by Richard Leong; Editing by Diane Craft)