US Treasuries rose on Thursday, extending a summer rally on subdued economic data and comments from Federal Reserve Chairman Ben Bernanke left investors relaxed about the outlook for inflation.
Treasury debt prices got a boost after Bernanke suggested the Fed could be more relaxed about rising wages since they would be countered by gains in productivity, limiting the inflationary impact.
Gains in bond prices pushed yields to their lowest levels since late-March or early April on short and longer dated Treasuries and also received encouragement from month-end buying by investors adjusting portfolios to match benchmark indexes.
Government reports showed the Fed's favoured gauge of US inflation rose less than expected in July, while a measure of Midwest business activity showed slower growth in August, suggesting the US central bank does not need to hike rates soon. The reports came out as the market prepared for Friday's monthly labour market report, a key reading on job growth for an economy that saw 17 Fed rate hikes in the two years to June, and after a slew of soft releases in recent sessions.
"Weak data and index related buying were the main things going on," said Dan Dektar, chief investment officer at Smith Breeden Associates in Chapel Hill, North Carolina.
In late New York trade, benchmark 10-year bonds were trading 5/32 higher on the day to yield 4.736. Buying during the day pushed the yield as low as 4.73 percent, according to Reuters data, while a break earlier in the week of resistance around 4.795 percent has improved the chart outlook.
Prices on two-year notes were up 2/32 at 4.788 percent. Speaking to the Clemson Institute for Economic and Community Development in Greenville, South Carolina, Bernanke said, "A case can be made that the strong productivity growth of the post-1995 era is likely to continue for some time."
By espousing the view that productivity will keep improving and benefit the economy, Bernanke "keeps fuelling this Treasury market rally," said Kevin Flanagan, fixed income strategist at Morgan Stanley.
A productivity growth trend of 2.5 percent would suggest the economy could grow around 3.5 percent a year without raising inflation pressures. "Productivity gains will be important because of their impact on unit labour costs. If Bernanke continues with this optimistic assessment, he would feel that any rise in unit labour costs would probably be more temporary so you won't get wage push inflation," said Flanagan.
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