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NEW YORK (Dow Jones)--Treasury prices rallied Tuesday as Federal Reserve Chairman Ben Bernanke reassured investors that key interest rates will stay low for some time in order to help the economy heal.
Gains built on Monday's higher prices, continuing with Treasurys' better tone this week following the prior week's rout. Last week, the 10-year yield pushed up by more than 30 basis points on better-than-expected earnings reports and after some more encouraging bits of economic data. Bond yields move inversely to prices.
Tuesday though, in testimony before the House Financial Services Committee, Bernanke soothed Treasury market investors with word that the federal funds rate will likely remain near zero for an extended period of time, despite recent improvements in the economy. The fed funds rate is currently at a 0%-to-0.25% range.
"Clearly, Treasury investors are focusing on the fact that short rates are going to be low for an extended period," said William O'Donnell, head of U.S. government bond strategy at RBS Securities Inc. in Greenwich, Conn.
Key in Bernanke's remarks was mention of the risk posed by the commercial real estate market, O'Donnell said, word that inflation should be subdued for the next two years and Bernanke's warning that the recent stabilization in consumer spending may not hold.
Remarks "painted about as bullish a picture for Treasurys as you can get," O'Donnell said.
Bernanke did offer a more upbeat assessment of the economy and financial markets, but he said the financial system does remain stressed and the labor market has continued to deteriorate. The jobless rate is already at a 26-year high of 9.5%; the Fed expects it ratchet up even more, ending the year between 9.8% and 10.1%.
Bernanke also offered details on how the Fed will eventually withdraw the massive amount of stimulus it has extended to the economy, steps that were first laid out in an editorial he wrote Tuesday in the Wall Street Journal. He made it clear, though, that at this point, the time is not ripe to put those strategies into play.
The chairman noted that some of the emergency measures put in place during the credit crisis have already begun to wind down, and that process should continue. Paying interest on bank reserves and conducting reverse repurchase agreements to drain liquidity from the system are two other tools that the Fed could eventually employ.
In late trade, intermediate Treasurys were outperforming, also helped by another round of Treasury buying from the Fed.
The seven-year note was 22/32 higher to yield 3.02%, and the 10-year note was up 31/32 at 3.46%. The two-year note was up 3/32, with its yield having fallen back below 1%, to 0.91%.
Tuesday, the Fed bought $7 billion of Treasurys maturing in the next seven to 10 years. The central bank has now bought about $217 billion of the as much as $300 billion it has pledged toward buying Treasurys. At its current pace, it will run though the $300 billion by its next interest-rate-setting meeting at the end of September.
The Treasury market Tuesday was also helped by renewed worries about the fate of business lender CIT Group Inc. (CIT). CIT, a source of funding for thousands of small to medium-sized businesses, said early Tuesday that a $3 billion rescue package from bondholders might not be enough to keep it from seeking bankruptcy protection.
-By Deborah Lynn Blumberg, Dow Jones Newswires; 212-416-2206; deborah.blumberg@dowjones.com
(Min Zeng contributed to this report)