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Bonds Unmoved by Ben, Part II

Treasuries yawn as Bernanke wraps up his second day of testimony before Congress.

Updated from 2:56 p.m. EST

Treasuries flatlined Thursday as the market shrugged off a slew of economic reports and

Federal Reserve

Chairman Ben Bernanke's question-and-answer session with the Senate Banking Committee.

Separately, the Treasury said it will sell $22 billion in two-year notes next Wednesday, and $14 billion worth of five-year notes on Thursday, to raise $9.9 billion in new cash.

"What the market is waiting for is whether the January data was influenced by

unseasonably warm weather, or if it's part of a continuation of strength," says Steve Rodosky, vice president of Pacific Investment Management Co., or PIMCO, one of the world's top Treasury buyers.

Rodosky adds that the market will turn its attention to numbers due out at the end of the month for early signs of February's economic activity, including retail sales figures and consumer confidence numbers.

The benchmark 10-year ended the day up 3/32 of a point to yield 4.59%, while the 30-year bond gained 2/32 to yield 4.57%. Bond prices and yields move in opposite directions.

The five-year and two-year notes were both unchanged on the session to yield 4.58% and 4.69%, respectively. The yield spread between longer-dated maturities and the two-year remained inverted, though the spread narrowed a bit from the morning. (

Click here for more on the inverted curve.)

In the first indication that January may be more than a blip on the radar, the February manufacturing index from the Philadelphia Fed jumped to 15.4 after falling to 3.3 in January. Wall Street had expected the number to come in 9.2.

The February reading is the strongest since August. The new orders component of the index stayed strong at 12.5 and shipments held up, as well. The prices paid component fell to its lowest level since August at 30.5.

And Friday brings with it the Producer Price Index for January, expected to rise by 0.1% as well as the University of Michigan consumer sentiment report.

Imitation of Greenspan

The market had geared up for day two of Bernanke's testimony on monetary policy before Congress, hoping that Senators would try to force him to divulge when rate hikes would end, a topic he didn't have to address during his appearance before the House Financial Services Committee Wednesday.

"But there really wasn't any new ground forged," says Rodosky. While members of the Senate Finance Committee peppered their interrogations with hot-button topics like China and the deficit, Bernanke refused to step out of bounds.

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During his first day of congressional testimony, the newly minted Fed head's prepared remarks didn't stray from the FOMC's

last policy statement, saying that the economy is strong, that inflation is being closely monitored and that further rate hikes seem likely in the near future and will depend on data.

Further echoing former Fed chief Alan Greenspan, Bernanke reiterated Thursday that the inverted yield curve -- with short-term rates higher than their long-term counterparts -- is not a major concern.

"Historically an inverted yield curve has often predicted a slowing in economic activity," he told senators Thursday, adding, "that relationship has weakened in the past 15 years or so."

Bernanke also said inversions have predicted recessions when interest rates are generally high, which tends to restrain activity. However, he said short-term rates are still in a "fairly normal range" and that long-term rates are "low, historically speaking," even after 14 straight quarter-point rate hikes.

In his prepared statement, he said the inverted yield curve could be largely attributed to demand from pension funds and foreign investors.

Whether the yield curve's inversion signals a recession, economists agree that low long-term rates have fueled the housing market, because the 30-year mortgage rate tracks the yield on the 10-year Treasury.

Sturdy Homes

To that end, January housing starts surprised to the upside, coming in at a strong 2.276 million annual pace vs. the forecast rate of 2.023 million, the Commerce Department reported. The December number was also upwardly revised to 1.988 million from 1.933 million.

Building permits, an indicator of future housing market strength, also came in above estimates at a 2.217 million vs. estimates for 2.068 million. The December figure was upwardly revised as well by 7,000 to 2.075 million.

Bernanke said the Fed is monitoring a slowdown in the housing market, which could directly affect consumer spending. Consumer spending accounts for about two-thirds of the nation's economic activity. Still, he seemed calm about the possibility of a slowdown, adding that the Fed's current expectation is that the slowing will be gradual and will be consistent with strong economic growth.

At one point, he said that if the market was hit with both higher energy prices that fueled inflation and a housing cooldown that slowed the economy, the Fed would "have to weigh the relative severity of the two risks and try to manage the risks in a way that will give ... the best outcome."

The central bank has also been closely eyeing the labor market for signs of wage inflation. The recently robust figures were tempered this morning by a Labor Department report showing that initial jobless claims came in at 297,000 last week vs. the estimated 285,000. Wholesale inflation data will be released Friday and the consumer price index will be out next Wednesday.

Bernanke noted that the Fed is watching for whether high energy prices will worm their way into core inflation readings. The Bureau of Labor Statistics said that January import prices rose 1.3%, up 8.8% year on year, on a large 6.4% gain in oil prices. Imports ex-petrol rose by just 0.2%.

The Fed chief refused to be rattled by the role that foreign central banks, particularly China, have played in Treasury sales, though the issue was clearly one of great concern for several senators.

"As those economies find more investment opportunities ... then the

global savings glut will dissipate," Bernanke said, indicating that those investors could diversify away from U.S. dollar-denominated assets at that point in time.

However, he said that would "likely to be a gradual process," and that he is "not aware of any significant changes in plans to hold U.S. assets by central banks."