By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices came off their lows Monday after Federal Reserve Chairman Ben Bernanke said further improvement in the U.S. labor market may depend on faster economic growth and improving demand.
Yields on 10-year notes 10_YEAR +1.61% , which move inversely to prices, rose 2 basis points to 2.26%, off a high of 2.29%. A basis point is one one-hundredth of a percentage point.
The benchmark securities closed as high as 2.39% last week, their highest yield level since late October and a big jump from 2% two weeks earlier.
Thirty-year bond yields 30_YEAR +1.66% rose 5 basis points to 3.35%. Yields had touched their highest level since September last week.
Shorter-term debt erased their declines, leaving 2-year yields 2_YEAR -2.17% little changed at 0.36%.
Yields on 5-year notes 5_YEAR +0.64% erased a rise to trade at 1.09%.
Last week, they closed at 1.20%, their highest since early August.
In a speech to the National Association for Business Economics, Bernanke said “a significant portion of the improvement in the labor market has reflected a decline in layoffs rather than an increase in hiring.”
And since more-rapid growth is needed to boost hiring, the Fed’s current ultra-low interest rate policy can help with that, he said.
The bond market’s reaction and a turn lower by the U.S. dollar indicate that investors viewed his comments as making it more likely that the Fed will take its time exiting ultra-loose monetary policy, and possibly will engage in more bond-buying activity. Read about the U.S. dollar.
Bernanke “appears to be emphasizing more dovish aspects of policy, suggesting that policy needs to remain highly accommodative and that recent improvements in the labor market may not necessarily continue,” said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities.
Bonds were weighed earlier by the German Ifo business-climate index which surprised to the upside, supporting equities. However, analysts also noted reports that German Chancellor Angela Merkel may be open to temporarily boosting the overall size of the euro-zone bailout funds, which would be a reversal from her prior stance. See more on Merkel.
The idea would be to increase the firepower of European bailout funding in hopes of avoiding spillover of the credit crisis into other peripheral economies, Spain in particular,” said Ian Lyngen, senior government bond strategist at CRT Capital Group.
The story “reminds us that Europe’s problems are by no means over,” he said.
Treasury prices remained mixed after data showed U.S. pending home sales in February unexpectedly declined.
Also weighing on bonds, the week brings the government’s auctions of $99 billion in notes.
Last week, bond yields fell, reversing some of the spike up that began in the prior week as investors interpreted a statement following the Fed’s policy-setting committee on March 13 as more optimistic and less inclined to more bond buying. Read about bond market last week.
“We view the slight rally last week as a healthy consolidation, as there was a confluence of several bond-bullish factors after a rapid move higher in yield,” said George Goncalves, head of U.S. rates strategy at Nomura Securities.
With the upcoming auctions and economic data, “we expect market sentiment to be risk-on in the next few days,” he added.
