Bernanke boosts short-term bonds

Most Treasurys rise as Fed chief Ben Bernanke offers a gloomy forecast for the economy, but long-term government bonds slip on inflation fears.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By David Goldman, staff writer

Do you feel your money is safe at your bank?
  • Yes
  • No
  • Unsure

NEW YORK ( -- Short-term bond prices rallied Tuesday, but long-term bonds fell after Federal Reserve Chairman Ben Bernanke gave a grim economic outlook.

The benchmark 10-year note rose 3/32 to 100 7/32 and yielded 3.84%, down from 3.88% late Monday. Bond prices and yields move in opposite directions.

The 2-year note gained 4/32 to 100 29/32, and its yield slid to 2.39% from 2.48% late Monday.

But long-term Treasurys sank, as Bernanke hinted that a rate hike to stem the tide of inflation may not be justified anytime soon in the rough economic climate. The 30-year long bond fell 15/32 to 98 10/32; its yield rose to 4.47% from 4.45% in the previous session.

Bernanke's tough talk

In a hearing before the Senate Banking Committee early Tuesday, Bernanke said multiple factors are dragging down the U.S. economy. (Full story).

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food and some other commodities," Bernanke told the committee.

When economic times are tough, investors tend to buy up government bonds, which are generally believed to be less risky investments than stocks.

"After Bernanke, we're seeing stocks struggling, turmoil continues in the wake of Fannie Mae and Freddie Mac, and financials remain weak," said Scott Anderson, senior economist with Wells Fargo. "Investors are looking for the perceived safe haven of the bond market."

Oil's drop eases short-term inflation concerns

Also supporting bond prices Tuesday was a drastic drop in oil prices. Crude futures plummeted by as much as $9 a barrel, before recovering a few dollars, as investor fear that the nation's financial woes could cut into demand deepened. (Full story).

"When oil falls, that helps on the inflation fears front," said Anderson.

Rising commodity prices - especially record oil prices - have pinched the pockets of Americans, resulting in a devalued dollar. Bond investors are typically wary of high inflation, because a declining dollar has the potential to negate the interest they earn on their investment.

Long-term inflation worries remain

For the long term, however, Bernanke expressed concerns about rising inflation risks stemming from high commodity prices, suggesting that the Fed might not be able to take steps to support economic growth because of those risks.

The Fed has historically raised interest rates to stem the tide of inflation, but Bernanke suggested the poor economic conditions may not support a decision to hike rates in the near future.

"Bernanke took out the phrase, 'Downside risk to growth had been diminished,' which puts the Fed firmer on the fence for a rate hike," said Anderson. "As a result, bonds will dance around the current range, but won't move much higher for the time being." To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Royal wedding: How much will it cost? Meghan Markle's wedding to Prince Harry could cost millions once security is included in the bill. See how the costs break down. More
Robot co-workers? 7 cool technologies changing the way we work Experts believe humans and machines will work much more closely together. More