U.S. Treasuries lower, market wary of Greenspan
(Updates prices)
NEW YORK, April 19 (Reuters) - U.S. Treasury prices edged lower on Monday but trading was thin as investors were wary of making any drastic moves ahead of key testimony this week from Federal Reserve Chairman Alan Greenspan.
With no fresh economic data to influence the market, the direction of interest rates was foremost on traders' minds.
Investors are eagerly awaiting the latest word from Greenspan, who is scheduled to testify on the banking industry before the Senate on Tuesday and on the economy to the Joint Economic Committee on Wednesday.
Bond bulls hope he will counter recent market talk about a possible early hike in interest rates, if only to stop yields from rising too far too fast.
"He does not want a rapid break in bond prices to snuff out the jobs recovery before it has a chance to catch hold," argued Chris Low, chief economist at FTN Financial.
A recent sharp rise in yields has dragged mortgage rates higher and choked off mortgage refinancing.
Traders noted a report from Fed-watcher Greg Ip in the Wall Street Journal suggesting the central bank was not about to hike rates at its meeting in May but would resort to "verbal tightening" so as to prepare the market for higher interest rates down the road.
That would entail shifting its inflation outlook to balanced, a move many analysts had already discounted, and perhaps even dropping its pledge to be patient on policy.
But that possibility did not seem to soothe the market's nerves. In Monday's erratic trade, the benchmark 10-year note <US10YT=RR> was down 7/32 in price, its yield at 4.37 percent. That is down from a 4.46 percent high last week but far from the 3.65 percent trough hit just last month.
Five-year notes <US5YT=RR> were off 6/32, their yields at 3.41 percent from 3.37 percent. Two-year notes were 1/32 lower, their yields <US2YT=RR> at 2.05 percent from 2.03 percent.
Thirty-year bonds <US30YT=RR> lost 14/32, allowing yields to climb to 5.20 percent from 5.17 percent.
A report in the Financial Times said the International Monetary Fund would warn the Fed this week that it needs to prepare the world economy for higher interest rates.
The next Fed policy meeting is on May 4 but the market is not fully pricing in a 25 basis point hike until the August 10 meeting.
"Greenspan will need to either confirm the 'patient' theory or ratchet up his view on jobs and the economy," said Richard Gilhooly, fixed-income market strategist at BNP Paribas.
"A more upbeat message will help to take two-year yields to 2.25 percent, while a patient or even a neutral speech will see the carry trade pulling yields lower again," he said.
In the carry trade, investors take advantage of the steep yield curve by borrowing at low short-term rates and lending at higher longer-term yields, a trade that has been popular the last couple of years
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