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Treasuries Extend Upward Move On Yellen Testimony

Extending the upward move seen over the two previous sessions, treasuries moved higher during trading on Wednesday.

After an early rally, treasuries gave back some ground but remained firmly positive. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 3.5 basis points to 2.327 percent.

With the continued decrease on the day, the ten-year yield pulled back further off the nearly two-month closing high set last Friday.

The continued strength among treasuries came as traders reacted to Federal Reserve Chair Janet Yellen's remarks before the House Financial Services Committee.

In her semiannual monetary policy testimony, Yellen said additional gradual rate hikes are likely to be appropriate over the next few years.

"Even so, the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades," Yellen said.

Yellen noted that there remains uncertainty about the outlook for inflation and said the Fed will be monitoring inflation developments closely in the months ahead.

The Fed chief also said the central bank is likely to begin a program to gradually reduce the size of its $4.5 trillion balance sheet this year.

Paul Ashworth, Chief U.S. Economist at Capital Economics noted Yellen did not offer specific guidance on the timing of either the next interest rate hike or when balance sheet normalization would begin.

"This is not a complete surprise, however, since it is still too early for the Fed to tip its hand on what it will do at September's FOMC meeting," Ashworth said.

He added, "It makes a lot more sense to wait and absorb another couple of months' worth of data, before providing a stronger steer to the markets around the time of the Jackson Hole conference."

Later in the day, the Fed released its Beige Book, which said economic activity expanded across all twelve Fed districts in June, with the pace of growth ranging from slight to moderate.

The Beige Book also said prices continued to rise modestly in the majority of districts, although a few districts noted that price pressures had eased slightly.

Treasuries saw continued strength following the release of the results of the Treasury Department's auction of $20 billion worth of ten-year notes, which attracted average demand.

The ten-year note auction drew a high yield of 2.325 percent and a bid-to-cover ratio of 2.45, while the ten previous ten-year notes had an average bid-to-cover ratio of 2.44.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

On Thursday, the Treasury is due to finish off this week's series of long-term securities auctions with the sale of $12 billion worth of thirty-year bonds.

Yellen's second day of testimony on Capitol Hill is also likely to attract attention on Thursday along with reports on producer prices and weekly jobless claims.

by RTTNews Staff Writer

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