Treasury Bond Prices End Mixed

The Associated Press
Thursday, March 29, 2007; 12:40 AM

NEW YORK -- Federal Reserve Chairman Ben Bernanke's address to Congress Wednesday walked a fine line between caution over growth and concerns about inflation, and left Treasury bond prices mixed by the end of the session.

At 5 p.m. EDT, the 10-year Treasury note was down 63 cents per $1,000 in face value, or 2/32 point, from its level at 5 p.m. Tuesday. Its yield, which moves in the opposite direction, rose to 4.62 percent from 4.61 percent.

The 30-year bond fell 11/32 point. Its yield rose to 4.83 percent from 4.81 percent.

The 2-year note rose 2/32 point. Its yield fell to 4.57 percent from 4.59 percent.

Yields on 3-month Treasury bills were 5.05 percent as the discount rate fell 0.01 percentage point to 4.92 percent.

Investors decided that the Fed's bid for flexibility in its interest-rate policy was bad news for the inflation outlook, and long-dated Treasury bonds sold off.

The day's trade left a 0.05 percentage point premium in the 10-year yield over the two-year, suggesting that the curve steepening trade that has gained in popularity so far this week remains intact.

The day's market activity "reveals the fact we're definitely in a new regime with the curve, where regardless of whether yields go up or down, the curve is going to steepen," said Dominic Konstam, head of interest rate strategy at Credit Suisse in New York.

The prevailing threat for the Fed now _ and one heavy in the subtext of Bernanke's comments Wednesday _ is that inflation may not moderate as growth slows, Konstam said.

This so-called stagflation risk "is higher now, and that's why the Fed needs more flexibility in its policy," he said.

"We need to give up on the predictability of either a hike or a cut" as the next Fed move, Konstam added.

In his prepared remarks, the Fed Chairman described inflation as "uncomfortably high." In the question and answer session, he dealt a clear slapdown to markets that last week were leaning toward a rate cut, based on an overly dovish interpretation of the Fed's latest policy statement.

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