Treasuries were little changed Wednesday as market participants waited on comments from new Federal Reserve Chairman Ben Bernanke, who is scheduled to speak before an independent bankers group in Las Vegas this afternoon. Bernanke is unlikely to make any direct comments about monetary policy, but the possibility exists and traders are on tenterhooks after the recent selloff. The market is pricing in at least two more quarter-point rate hikes by the end of May, which would bring the overnight lending rate to 5%. Further moves seemed like a near certainty after St. Louis Fed President William Poole said late Monday that the central bank will "have to step a little harder on the brake" if upcoming data exceed expectations, and that it's safer to err on the side of being more restrictive than to risk inflation. Most recently, the benchmark 10-year note was down 2/32 of a point to yield 4.74%, while the 30-year bond was down 5/32 to yield 4.72%. In shorter maturity debt, the two-year and five-year were both little changed, with both notes yielding 4.75%. With no economic reports scheduled for release, comments from Fed officials will be closely watched. However, most market participants doubt that anything "off message" will be said. "Market moves will likely be dictated by flows, though we do not expect any big moves," fixed-income analysts with Barclays wrote in a research note. "With payrolls on Friday, we believe rates will remain relatively range-bound as investors take some risk off the table and wait for that number." In addition to Bernanke's meeting with Federal Reserve bankers in Las Vegas, St. Louis President William Poole, Fed Governor Donald Kohn, New York President Timothy Geithner and Chicago President Michael Moskow will deliver speeches by the end of the week.
The Fed chairman, Fed governors and the New York Fed president are voting members of the policy-setting Federal Open Market Committee. Poole and Moskow don't vote this year. In an echo of Fed speeches past, Moskow said Tuesday evening at the University of Chicago Graduate School of Business that inflation pressures require "careful monitoring" as the expansion approaches the limits of "resource utilization," referring to the tightening labor market. "With the unemployment rate currently at 4.7% and capacity utilization near its long-run average, it is important to ask how much slack remains in the economy,'' Moskow said. But he did not make any firm comments as to how high the fed funds rate should go. Wednesday morning, Poole seemed relatively unconcerned about the housing outlook, saying that housing will stabilize and remain strong. He also said that the sales and home price growth slowdown will not significantly affect consumer spending. In housing sector news, the weekly Mortgage Bankers Association mortgage applications index rose 0.7% last week, with purchasing applications down 0.4%. The 30-year mortgage rate edged higher to 6.31%, while the 15-year rose 13 basis points to 5.97%. But analysts at ABN Amro said that the widely expected housing market slowdown will be a drag on real economic growth. "Real growth is expected to gradually decelerate, in large part due to a projected cooling in the housing market," wrote chief U.S. economist Steven Ricchiuto. "Specifically, we anticipate real GDP will lose about 1.7% of its upside momentum as the year progresses." Slowing economic activity "will keep the civilian unemployment rate from falling below 4.7% and should allow the FOMC to finally pause the ongoing tightening cycle once the funds rate hits 5% in the second quarter," Ricchiuto wrote.