Bonds supported in Asia, stimulus hopes on the wane

TOKYO: US Treasuries were supported in Asia on Friday after posting their first gains in a week the previous day on growing speculation that Federal Reserve chief Ben Bernanke will probably not give a strong hit of more stimulus in his speech later in the day.

US bond yields fell Thursday on dwindling expectations there will be hints on fresh easing steps in Bernanke's speech on Friday in Jackson Hole, Wyoming, where he hinted at a new round of quantitative easing exactly a year ago.

The yield on 10-year notes stood at 2.23 percent, unchanged from late US levels on Thursday.

As long-dated bonds had surged last week on expectations that the Fed could extend bond purchases to longer-dated debt or pledge to increase bond buying, disappointment over the speech could steepen the Treasury yield curve.

The yield gap between 10-year notes and 30-year bonds stood at 138 basis points, out from 132 basis points on Monday but down from 147 basis points on Aug. 12, the widest level since late 2010.

The recent flood of disappointing data has raised the pressure on the Fed to do more, but mixed results from the recently ended second round of quantitative easing, or QE2, together with blistering criticisms would make Bernanke cautious about engineering another round of monetary stimulus, analysts said.

Still the urgency for another Fed rescue could intensify, if the government downgrades the second-quarter US gross domestic product to below the precarious 1 percent threshold on Friday from the originally reported 1.3 percent annualized rate.

"If investors start to think that growth in the third and fourth quarter will be more or less around 1 percent, then there could be more buying," said a trader at a Japanese bank.

Copyright Reuters, 2010