Bernanke Comments Lead To Continued Strength Among Treasuries

(RTTNews) - Treasuries extended their recent upward trend on Wednesday, benefiting from a positive reaction to comments from Federal Reserve Chairman Ben Bernanke.

After moving sharply higher in early trading, bond prices gave back some ground over the course of the session but remained firmly positive. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 4.1 basis points to 2.491 percent.

The strength among treasuries came in reaction to Bernanke's prepared testimony before the House Financial Services Committee.

Bernanke reiterated that the central bank believes it would be appropriate to begin scaling back its asset purchase program later this year if incoming data is broadly consistent with projections.

The Fed chief added that the asset purchase program could be wrapped up by mid-2014, although he stressed that asset purchases depend on economic and financial developments and are by no means on a preset course.

Bernanke also said highly accommodative monetary policy will remain appropriate for the foreseeable future, suggesting that interest rates will remain low even after the Fed halts its stimulus program.

Chris Low, chief economist at FTN Financial, said, "Bernanke's remarks today are similar to previous ones, but the tone is decidedly more dovish, suggesting he would like to walk back at least some of the recent rise in interest rates." "Coupled with a lousy housing starts release, the outlook for Fed policy looks decidedly more bond friendly," he added.

The remarks from Bernanke largely overshadowed the release of a report from the Commerce Department showing an unexpected drop in housing starts in the month of June.

The Commerce Department said housing starts tumbled 9.9 percent to an annual rate of 836,000 in June from the revised May estimate of 928,000.

The steep drop came as a surprise to economists, who had expected housing starts to climb to an annual rate of 951,000 from the 914,000 originally reported for the previous month.

The report also showed an unexpected decrease in building permits, which are seen as an indicator of future housing demand.

Late in the trading day, the Fed released its Beige Book, which consists of anecdotal evidence on economic conditions in each of the twelve Fed districts.

The Beige Book said overall economic activity has continued to increase at a modest to moderate pace since the previous survey.

Bernanke is due to make another appearance on Capitol Hill on Thursday, with the Fed chief scheduled to testify before the Senate Banking Committee.

While Bernanke's prepared remarks are likely to be same as his House testimony, traders are likely to keep an eye on the question-and-answer portion of his appearance.

Trading could also be impacted by the release of reports on weekly jobless claims, leading economic indicators and Philadelphia-area manufacturing activity.