US Treasury debt prices rallied on Thursday after Federal Reserve Chairman Ben Bernanke said the Fed may pause its cycle of interest-rate increases. While leaving the door open to further moves, Bernanke's remarks to a congressional panel prompted a drastic rethink of interest-rate expectations.
The two-year note - the maturity most sensitive to the market's outlook for Fed rate moves - gained 5/32 in price for a yield of 4.91 percent, down from 4.99 percent late on Wednesday; the biggest fall in its yield in a month. Bond yields and prices move inversely. Earlier this week, Treasuries had sold off sharply as the latest batch of economic data proved surprisingly strong.
"The Fed may pause even if the risks aren't balanced," said Kevin Flanagan, fixed-income strategist at Morgan Stanley. "Bernanke is trying to tell you that we will still pause even if the numbers come in as they have so far this year."
In his comments to Congress, Bernanke said: "Even if in the committee's judgement, the risks to its objective are not entirely balanced at some point in the future, the committee may decide to take no action at one or more meetings."
He was referring to the Federal Open Market Committee, the Fed's policy-making body, which has raised interest rates 15 times since June 2004.
Wall Street was still pricing in one additional increase in official rates to 5 percent in May, but the chances of a subsequent move in June were pared back to 34 percent from 72 percent.
Treasury debt prices recovered modestly after Federal Reserve Board Governor Donald Kohn said that a standard forecast has the economy slowing a bit to trend this year and next, citing the effects of cooling in housing markets.
Five-year notes yielded 4.96 percent, down from 5.02 percent on Wednesday.
Gains were pared in the wake of a poorly received $14 billion auction of five-year notes.
"There wasn't a tremendous amount of interest for the auction," said William John, co-head of US Treasury trading with Barclays Capital in New York.
The benchmark 10-year Treasury note rose 7/32 in price while its yield slipped to 5.08 percent from 5.11 percent late Wednesday.
The 30-year bond yielded 5.16 percent, from 5.17 percent late on Wednesday.
The yield curve steepened, with spreads between 10- and two-year notes widening to about 17 basis points from 12.
"The market is clearly a lot steeper on our interpreting (Bernanke's) comments to mean a pretty good probability we will see a pause from the Fed pretty soon," said Barclays' John.
The bond market was bracing for an advance report of US first quarter gross domestic product due on Friday. Wall Street is expecting a blockbuster number, with median forecasts from economists surveyed in a Reuters poll for a rise of 4.9 percent.
Yet underlying Treasury market sentiment was bullish and the market could withstand a very robust economic growth report, some said. "The Fed's base case is for a slowing of GDP growth going forward. I think that has effectively put a floor under the market," said William O'Donnell, head of US interest rate strategy and research with UBS in Stamford, Conn.
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