Treasurys drop as market waits for Fed signals

NEW YORK (MarketWatch) — Treasury prices dipped on Tuesday, paring back gains from recent sessions as the market looked for signs of when the Federal Reserve may begin to shift away from its accommodative monetary policies.

Bloomberg Enlarge Image Ben S. Bernanke, chairman of the U.S. Federal Reserve, will speak Tuesday evening.

The benchmark 10-year note (10_YEAR)  yield, which moves inversely to price, rose 4 basis points on the day to 2.711%. The 30-year bond (30_YEAR)  yield rose 4.5 basis points to 3.803%, and the 5-year note (5_YEAR)  yield rose 4 basis points to 1.358%.

Fed Vice Chairwoman Janet Yellen, who has been nominated to lead the central bank, testified before the Senate Banking Committee last week. Her stated commitment to Fed bond buying pushed back market expectations for when the central bank may begin to scale back the program, bolstering the Treasury market in her wake. Yellen continued to defend the bond-buying policy in letters to senators that were released Tuesday.

More clues about the fate of that program may come when Fed Chairman Ben Bernanke speaks Tuesday evening in Washington D.C. On Wednesday, the Federal Open Market Committee will release minutes from its meeting in October, in which it decided not to scale back its bond-buying program. Another checkpoint on the economy will come Wednesday with the release of reports on retail sales, consumer prices and home sales.

"The data is not insignificant, because it could tell us about economic growth and inflation," said Kevin Giddis, head of fixed income at Raymond James. He added: "Probably the most interesting thing that comes out of the minutes will be what some of the Fed governors think about tapering in general."

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The market has begun to separate tapering expectations from the time-frame for a hike to the Fed's short-term interest rates, which are expected to remain near zero for the foreseeable future.

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Treasurys pushed lower overnight as Asian debt supply hit the market. U.S. government debt also fell after the release of the German ZEW economic sentiment indicator, which climbed to its highest level since 2009, at 54.6 points, but missed expectations of 55. Prices continued to fall as issuance in the corporate bond market sapped some demand from the market.

An upbeat speech by New York Fed President William Dudley on Monday afternoon added to a sense of optimism about the economy, which may be poised to continue this week.

"We believe that Fed speak may continue to sound relatively more optimistic in the near term, especially as Bernanke and Dudley are likely looking to keep the market on side ahead of tomorrow's October FOMC minutes release," said Gennadiy Goldberg, U.S. strategist at TD Securities, in a note.

Data on Tuesday showed the employment cost index climbed 0.4% in the third quarter. The measure of civilian worker compensation costs slowed slightly from 0.5% in the second quarter. Economists had expected a 0.5% reading.