February 22, 2013 / 9:06 PM / in 5 years

TREASURIES-U.S. bond prices firm before Bernanke's testimony

* Bernanke seen voicing support for continued bond purchases
    * ECB loan repayment news offsets rise in German sentiment
    * Benchmark U.S. yields remain locked in tight 13-bps range

    By Richard Leong
    NEW YORK, Feb 22 (Reuters) - U.S. Treasuries prices edged
higher on Friday in the absence of key U.S. economic data, as
investors prepared for testimony next week from Federal Reserve
Chairman Ben Bernanke, which will be scoured for clues of when
the central bank may slow or stop buying bonds.
    Since Wednesday's release of the Federal Open Market
Committee's minutes of its Jan. 29-30 meeting, investors have
coalesced around the view Bernanke will likely reassure markets
and U.S. lawmakers that the Fed is committed to its third round
of quantitative easing, dubbed QE3, at least through the end of
the year in an attempt to reduce unemployment.
    Bernanke, who is the architect of the Fed's current
near-zero interest rate policy and bond purchase program, will
testify before the Senate Banking Committee on Tuesday and the
Housing Financial Services Committee on Wednesday. 
    "Bernanke will likely remind us that the Fed will remain
accommodative through the end of the year," said Andrew Richman,
fixed income strategist at SunTrust Private Wealth Management in
Palm Beach, Florida. 
    Such a view from Bernanke will likely soothe anxiety from
the latest FOMC minutes and comments from some top policy-makers
that the Fed might reduce their bond purchases before year-end.
    On Friday, Boston Fed President Eric Rosengren and Fed
Governor Jerome Powell defended the Fed's bond buying, which is
running at $85 billion a month. 
    A continued generous amount of Fed stimulus will likely
support this year's solid gains in stock prices and commodities
markets and hold benchmark yields in a tight trading range,
investors and analysts said.
    Since Jan. 25, the yield on the 10-year Treasury note
 has traded in a 14 basis point range. It rarely
closed 5 basis points on either side of 2 percent.
    On Friday, the 10-year note was 2/32 higher in price at
100-10/32, yielding 1.964 percent, down 1 basis point from late
on Thursday. The 10-year yield was on track to close 4 basis
points lower in an abbreviated trading week.
    The 30-year bond was up 7/32 with a yield of
3.15 percent, down 1.2 basis points from late on Thursday. The
30-year yield was set to fall nearly 3 basis points on the week.
    Bond gains were limited on revived buying in stocks, which
investors sold heavily on Wednesday and Thursday on worries
about Fed reducing its stimulus.
    Wall Street stocks were higher in late trading with the
Standard & Poor's 500 index rising 0.8 percent. 
    Treasuries began the day trading lower in price, with
traders citing a small increase in selling pressure after the
German Ifo sentiment survey beat forecasts and offset some
pessimism about euro zone growth prospects. 
    Losses were tempered by news that banks in Europe will repay
less than half the expected amount of crisis loans they took
from the European Central Bank a year ago, which suggested much
of the euro zone financial system was still dependent on cheap
ECB funds. 
    Treasury debt prices were also supported by worries over the
economic impact of automatic U.S. government spending cuts set
to begin March 1. 
    Few analysts expect Democrats and Republicans to reach
agreement on averting these "sequester" cuts ahead of the
deadline. Economists said these cuts worth $85 billion would
hurt the economy and lead to job losses. 
    "We have a lot of headline risk from the sequester. That's
scary ramification that might be good for Treasuries but bad for
economic growth," said Mike Lorizio, head of Treasuries trading
at Manulife Asset Management in Boston.
    Investors were also reluctant to part with lower-risk assets
like Treasuries heading into the Italian national elections on
Sunday and Monday as the country struggles in a deep recession.
    Risk from Washington and Europe will likely stoke bids for
next week's government debt supply, totaling $99 billion,
traders and analysts said.
    The Treasury Department will kick of next week's auctions
with a $35 billion sale of two-year notes on
Monday. It will be followed by a $35 billion of five-year debt
auction on Tuesday and $29 billion of seven-year
note sale on Wednesday.

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