February 26, 2013 / 2:50 PM / in 5 years

TREASURIES-Yields near 1-month lows before Bernanke testimony

* Minor price cuts before Treasury sale of $35 bln of 5-yr
    * Fed Chairman Bernanke congressional testimony at 10 a.m.
EST in focus
    * Testimony expected to support Fed's bond purchases
    * More planned government spending cuts damp any
profit-taking after rally

    By Ellen Freilich
    NEW YORK, Feb 26 (Reuters) - U.S. Treasuries slipped on
Tuesday as traders took some profits on a rally that left yields
at one-month lows.
    "There was heavy selling volume when 10-years hit the
extreme overbought levels," said Tom DiGaloma, managing director
at Stamford, Connecticut-based Navigate Advisors LLC.
    Expectations Fed Chairman Ben Bernanke would defend monetary
accommodation in congressional testimony later was a
double-edged sword for Treasuries.
    On one hand, continued large purchases of bonds by the
central bank are supportive for the U.S. Treasury market. On the
other hand, accommodative monetary policy helps riskier assets,
which can give them an advantage over safe-haven U.S. debt in
investors' eyes.
    "Bernanke will likely be dovish today which should let
stocks move higher and bonds move lower, at least short-term,"
DiGaloma said.
    Stocks opened higher on Wall Street.
    Bernanke begins two days of congressional testimony at 10
a.m. EST (1500 GMT) during which some members of Congress will
question the Fed's bond-buying program, known as quantitative
easing - or QE - and try to measure his confidence in the
economic recovery.
    "Most people expect Bernanke to indicate that the Fed will
continue its current quantitative easing policies," said Kathy
Jones, fixed-income strategist at Charles Schwab.
    Bonds rallied strongly on Monday, with the uncertain
election result in Italy cited as the main driver.
    "The possibility that European voters may reject austerity
measures encourages investors to seek safety in Treasuries,"
Jones said.
    Earlier, Italian bonds fell on the election
results, dragging other peripheral euro zone debt 
    The inconclusive Italian election raised fears of political
instability in the region's third-biggest economy.
    Still, with potentially supportive factors on the horizon,
selling in U.S. Treasuries was limited.
    At the top of such factors are planned cuts in U.S.
government spending that could further slow already tepid U.S.
economic growth.
    The across-the-board cuts are set to take effect on March 1
and the White House and Congress appear to have no negotiations
underway to avoid them. 
    "Fiscal policy has already been tightened with the end of
the payroll tax cut, and now the prospect of sequestration
starting at the end of this week could mean even more constraint
on consumer incomes and spending," Jones said.
    Less demand could weaken growth and contribute to
disinflation, a bearish scenario for riskier assets, but a
bullish one for safe-haven bonds whose fixed income translates
into more buying power when retail and wholesale prices decline.
    The rally of the last few days may, itself, beget more gains
for Treasuries as some institutional money managers buy bonds to
extend duration by month-end on Thursday, traders said.
    On the supply front, the Treasury is scheduled to sell $35
billion in five-year notes at 1 p.m. EST (1800 GMT) on Tuesday.
It sold the same amount in two-year notes on Monday.
    After the 10-year note yield posted its biggest one-day drop
since early November on Monday, that yield rose to 1.89 percent
from 1.86 percent late on Monday. The 10-year note
fell 5/32 in price.
    After posting its biggest one-day drop since June 1 on
Monday, the 30-year bond yield rose to 3.07 percent
from 3.06 percent late on Monday.
    The 30-year bond price slipped 9/32 on Tuesday after rising
nearly two full points on Monday, .
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