Bonds rise on Bernanke's caution

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NEW YORK (Reuters) -- U.S. Treasury prices rose sharply on Tuesday as Federal Reserve Chairman Ben Bernanke indicated that the economy is too weak for the Fed to tighten its monetary policy any time soon.

The price of the benchmark 10-year bond price rose a point, and the 30-year bond rose two points, on Bernanke's testimony before a congressional committee on Tuesday.

Bernanke repeated sentiments expressed in minutes of the Federal Open Market Committee released last week and an opinion piece by him published in Tuesday's Wall Street Journal, at the congressional hearing.

"There wasn't really any room for surprises," said Kim Rupert, managing director of global fixed-income analysis at Action Economics LLC.

"The market was just waiting to make sure that Bernanke didn't say anything that would upset the apple cart, and once the testimony was out, Treasurys took off sharply higher," she said.

Ten-year bond prices were up 31/32 for a yield of 3.48%, versus Monday's closing yield of 3.6%. Thirty-year bond prices increased 2-5/32 to yield 4.38%, down from Monday's yield of 4.5%.

Bernanke's testimony reassured listeners that the Federal Reserve had a strategy to exit its quantitative easing program, but he warned that given the economic outlook, interest rates would remain low for some time.

"They (the Federal Reserve) expect inflation to be contained, benign, and capped over the next few years," said Bill O'Donnell, head of U.S. Treasury strategy at RBS Securities. "What Bernanke expects out of the economy in the coming few years is all bond-friendly."

Inflation tends to erode the value of bonds over time.

Tuesday's hike in Treasury prices comes after a week of rising bond yields, caused by a rally in stocks. But stocks eroded over the day, providing support for Treasury price gains.

Higher Treasury yields tempted investors out of the woodwork, even as the market prepares for $90 billion of new Treasury supply, to be auctioned next week.

"A lot of the backup in Treasury yields over the past week or so has been in preparation" for the debt sales, said O'Donnell. "We have started to see retail investors come out of their cocoon, and we have heard anecdotes that people have cash committed for these auctions."