Longer-dated US Treasury debt prices rose on Tuesday as investors awaited an inflation report and testimony by Fed Chairman Ben Bernanke, both of which are expected to paint a cloudy picture of the economy. Though most analysts acknowledge the economy's improvement from the worst recession in decades, they say the recovery is unlikely to reach breakneck speed anytime soon, keeping demand for safe-haven Treasuries intact.
This view found support from a downcast small business survey and trade deficit data that reeled in some expectations for the pace of first quarter economic growth, which helped push benchmark bond yields to their lowest in three weeks. Analysts expected Wednesday's inflation report and testimony by Bernanke before the US Congress' Joint Economic Committee to lend further affirmation to this notion.
"Most people seem to be expecting a dovish talk from Bernanke tomorrow. He's going to be cautious and he's going to talk about inflation possibly heading lower or being subdued," said Suvrat Prakash, US interest rate strategist with BNP Paribas in New York. "Then you've got an inflation report on the same day which is expected to show another drop in core inflation. I think those things in the near-term are supportive of the market. That's why for a few days we've been in the rally camp for Treasuries."
Benchmark 10-year Treasury notes were trading 7/32 higher in price to yield 3.82 percent, down from 3.85 percent at Monday's close. Yields fell as far as 3.80 percent, the lowest level since March 24. The two-year note was trading flat in price, yielding 1.05 percent.
Tuesday's trade flattened the Treasury yield curve, narrowing the spread between yields on two-year notes and 10-year notes to 276 basis points, which compared with the tightest daily closing yield gap since March 24, according to Reuters data.
Wednesday's consumer price inflation report is due at 8:30 am. Bernanke begins speaking at 10 am. Analysts were also fixated on the just-started US corporate earnings season. While there are expectations of good results, many wonder whether the underlying details will reflect an improving economy or just austerity measures undertaken by companies eager to save money in a challenging sales environment. "I think earnings will actually go well and I'm marginally optimistic on the absolute magnitude of the number of earnings," said Christian Cooper, interest rate strategist at RBC Capital Markets in New York.