Bernanke reawakens steepeners

By Kevin Plumberg

NEW YORK (Reuters) - The U.S. Treasury yield curve could steepen further on Thursday if jobless claims and revised fourth-quarter economic growth data reflect slowing growth and rising inflation.

Comments by Federal Reserve Chairman Ben Bernanke on Wednesday, in testimony before Congress, showed the central bank remained focused on shielding the economy from a credit crisis, but his warnings on inflation pressures weighed on long-dated government bond prices.

Treasuries with short maturities were stable, suggesting that the market's vulnerability to incoming data or comments on inflation was on the longer-dated bonds, which could cause the yield curve to steepen.

"Unless we get another credit tape-bomb or bad news on the credit front, yields could continue to drift higher as you can see on the back end," said Ralph Manigat, an analyst with 4Cast in New York. "The curve has been buoyed on the front because of bad data, but the long end has been selling off on an inflation scare."

Dealers will be looking out on Thursday for weekly jobless claims data as well as the second take on growth in gross domestic product in the fourth quarter. Last week, the four-week average of claims for unemployment rose for the fourth consecutive time to levels associated with recessionary conditions.

Bernanke will testify on Thursday before the Senate Banking Committee. His comments on Wednesday did little to alter market expectations that the Fed will cut its benchmark interest rate by 50 basis points next month, bringing the fed funds rate to 2.5 percent.

"Fed Chairman Bernanke stressed the downside risk to growth in his discussion on the economic outlook," said Drew Matus, senior financial economist with Lehman Brothers in New York.

"The focus on the medium-term outlook and the continued focus on the weak growth outlook support our view that the Fed will cut rates by 50 basis points at the 18 March FOMC meeting and will continue to cut rates beyond that in order to limit the downside growth risks," Matus said in a note.

Such expectations have been pivotal in pushing the yield on the benchmark 2-year note to a low for the year of around 1.83 percent two weeks ago. Since then it has gravitated around 2 percent.

Meanwhile, the 10-year yield has been gradually rising since mid January, bringing the spread over the 2-year yield to 185 basis points on Wednesday, close to a 3-1/2-year high of 192 basis points hit in mid February.

(Editing by Leslie Adler)