Treasurys rise as Bernanke eases inflation fears

NEW YORK — Treasurys reversed early losses and moved higher for a second day in a row Tuesday as investors took comfort in remarks from Federal Reserve Chairman Ben Bernanke that inflation will remain low.

In his semiannual address to Congress, Bernanke assured investors and members of the House Financial Services Committee that the central bank will be able to exit its economic stimulus programs and ward off inflation as the economy becomes more stable.

Bernanke said Fed officials expect inflation to be somewhat lower this year than in recent years, and that most expect it to remain subdued over the next two years. Inflation hurts Treasurys because it chips away at the value of their fixed returns over time.

“If I hear from the Fed chairman that he believes inflation will not be a problem for the next two years, that is kind of an open-ended reason to go out and buy (Treasurys),” said Kevin Giddis, managing director of fixed income at Morgan Keegan.

Long-term Treasury yields are closely tied to rates on loans such as mortgages, so lower yields in the bond market can mean lower borrowing rates for consumers.

At the same time, Bernanke kept a cautious stance on the economy, saying that the recovery will be gradual, and reaffirmed his pledged to keep the benchmark interest rate at a record low of near zero for an “extended period.”

That was welcome news to investors who had worried that the Fed might raise interest rates too soon to combat inflation, which could hinder the economy’s recovery by saddling consumers with higher borrowing costs.

Meanwhile, the Fed’s purchase of $7 billion in Treasurys having a maturity date ranging from seven to 10 years also boosted the market Tuesday.

The Fed has been buying large amounts of government debt this year to help offset the supply being pumped into the system. That helped ease fears that the flood of new government debt coming to market might be met with weak demand.

In early afternoon trading, the benchmark 10-year Treasury note rose nearly a point to 97 1/32, sending its yield down to 3.48 percent from 3.60 percent late Monday.

The 30-year bond rose 1 30/32 to 97 21/32, and its yield dropped to 4.39 percent from 4.52 percent.

The two-year note edged up 4/32 to 100 13/32, while its yield fell to 0.91 percent from 0.98 percent.

The yield on the three-month T-bill rose to 0.18 percent from 0.17 percent.

Treasurys moved higher Monday in anticipation of Bernanke’s testimony, but had sold off a bit early Tuesday as stocks moved higher on better earnings reports.

Bernanke’s still-cautious assessment of the economy gave investors reason to take pause from a recent rally, and stocks pared their early gains. As the buying on Wall Street eased up, investors looked to put their money in Treasurys, which looked more attractive after Bernanke’s remarks, Giddis said.