TREASURIES-Bernanke disappointment pummels bonds

TREASURIES-Bernanke disappointment pummels bonds
By Burton Frierson
Copyright by Reuters
http://www.reuters.com/article/idUSN2712955720100827


NEW YORK, Aug 27 (Reuters) - U.S. Treasuries fell sharply on Friday after Federal Reserve Chairman Ben Bernanke signaled no new bond buying by the central bank was imminent, triggering the worst sell-off in three months.

Although Bernanke did mention such purchases as a possibility, investors found nothing in his comments to indicate the Fed has any immediate plans to stimulate the slowing economy through an expansion of current bond buying.

For a market already at rich levels, this was an important nuance that further fueled a sell-off ignited after data earlier on Friday showed economic growth was not quite as weak as expected in the second quarter.

Although the Fed did say on Aug. 10 it would use cash from maturing mortgage bonds it holds to buy more government debt, the market was gearing up for even more quantitative easing due to a poor run of economic indicators in recent weeks.

"Apparently there was a lot of unfounded hope that Bernanke was going to indicate that additional quantitative easing was going to take place sooner rather than later," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co. in Seattle.

"He clearly indicated that it will happen if needed and that 'if needed' is very important."

The 30-year long bond US30YT=RR was down three points on the day, yielding 3.67 percent versus Thursday's close of 3.51 percent.

Broadly speaking, the bond market was on track for its worst one-day sell-off in three months, based on the rise in 10- and 30-year yields.

However, even if the selloff holds, the 30-year bond yield would only be about one basis point higher on the week, signaling the intensity of the rally in previous days.

The benchmark 10-year note US10YT=RR fell more than a point and was last down 1-11/32 in price, yielding 2.64 percent versus Thursday's close of 2.48 percent.

If the sell-off gains additional momentum, traders will be watching to see if support holds at 2.67 percent in 10-year notes. (Additional reporting by Richard Leong; Editing by Leslie Adler)