Longer-dated US Treasury debt ground higher on Wednesday as investors appeared unimpressed by Federal Reserve Chairman Alan Greenspan's warning that interest rates should continue to rise. After an initial jolt lower on Greenspan's upbeat assessment of economic conditions, longer-dated bonds trimmed losses to squeeze above the break-even mark.
Ten-year notes managed to climb 4/32 to yield 4.17 percent against 4.18 percent on Tuesday, having failed to break key resistance at 4.25 percent.
Greenspan largely reiterated the central bank's recent line of thinking - economic growth is steady and inflation is contained, a scenario that should allow policy-makers to continue tightening monetary policy.
This pressured two-year notes 1/32 lower for a yield of 3.88 percent, which had hit a new four-year high of 3.93 percent earlier in the session.
The market quickly settled back into its recent range, so traders figured the only way to make money was to bet on a flatter yield curve.
As they did this, spreads between 10- and two-year debt narrowed to 29 basis points, close to a 4-1/2 year low and exacerbating what Greenspan has termed the "conundrum" of low long-term rates in the face of rising short-term rates.
Despite his reference to higher rates, Greenspan offered few further clues as to just how much officials might raise them, leaving the market to wobble to and fro within its recent range.
"He really is playing his cards close to the vest," said Jerry Zukowski, deputy chief economist at Nomura Securities. "There's an inference that they will raise rates more than once but I don't think we can necessarily reach that conclusion based on what he said today."
Others interpreted Greenspan's comments as a clear signal that rate hikes would persist for some time to come.
"There are no signs that the Fed is ready to finish the tightening process," said Christopher Low, chief economist at FTN Financial. "If you look at the fed funds futures, there are three tightenings still priced in."
Torn between the two possibilities, five-year notes were up just 1/32 for a yield of 3.98 percent. The 30-year bond jumped 15/32 and was yielding 4.40 percent.
Greenspan will make another appearance before the Senate on Thursday, but he was set to deliver the same speech and analysts were not expecting any ground-breaking remarks from the question-and-answer session.
One major caveat to his rosy growth picture was the housing market, with the chairman ratcheting up a notch his warning about "froth" in some regional markets.
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