Hopes for new Fed program push 10yr yield under 2pc

NEW YORK: US Treasury debt prices rallied on Thursday as a combination of vague encouragements from Federal Reserve Chairman Ben Bernanke and a dismal data point on the job market raised hopes for another Fed bond buying program.

Bernanke told an audience at the Economic Club of Minnesota that the Fed will "do all it can to help restore" economic growth and employment.

The rally in Treasuries pushed the 10-year yield back under 2 percent, while the 30-year bond posted gains of more than a full point late in the trading day.

Many market participants took that to mean the Fed could implement a maneuver dubbed Operation Twist, in which it would sell short-term Treasuries from its balance sheet and buy long bonds to help lower long-term interest rates.

"It's almost like if it's really bad then it must be good because then Bernanke will be forced to step in," said Doug Roberts, chief investment strategist at at Channel Capital Research in Shrewsbury, New Jersey.

Many analysts expect the Fed could announce the program at its next scheduled policy meeting, on Sept. 20-21.

"Operation Twist continues to get a lot of press, and Trichet came out and talked about unusual measures to stem the economic tide, and with that the market has gotten a lift," said Scott Graham, head of government bond trading at BMO Capital Markets in Chicago.

Data showing an unexpected rise in US jobless claims last week also was supportive of Treasuries prices. Continued high unemployment is seen as one of the major hobbles to the US economic recovery.

"We get one report that's really bad like the initial claims number this morning and as long as the hope is there, it seems to form some type of expectation for stimulus," Roberts said.

US President Barack Obama on Thursday evening will speak on the employment situation, and he is expected to unveil a jobs-creation package worth $300 billion.

Benchmark 10-year notes were trading 18/32 higher in price to yield 1.99 percent, down from 2.05 percent late Wednesday, while 30-year bonds were 1-7/32 higher in price to yield 3.31 percent from 3.37 percent.

"We don't know what (Bernanke and Obama) can do about 9 percent unemployment, but we are hopeful their words of confidence will calm the stock market, that most leading of economic indicators," said Chris Rupkey, financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Comments from European Central Bank President Jean-Claude Trichet were also seen as indicating rates in the currency bloc will remain on hold, setting a bullish tone for government debt globally.

The ECB's Trichet said inflation risks in the euro zone are broadly balanced, which cemented expectations that interest rate increases are on the back burner. He also flagged slow growth ahead for the currency bloc and said even that was uncertain.

In the United States, applications for unemployment benefits rose to 414,000 in the week ending Sept. 3 from an upwardly revised 412,000 the prior week, the Labor Department said. Wall Street analysts had been looking for a dip to 405,000.

Copyright Reuters, 2011