Treasuries, Yen Rise as Bernanke Details Plan to Curb Inflation

July 21 -- Treasuries, the yen and the dollar rose after Federal Reserve Chairman Ben S. Bernanke said the central bank will be able to stem inflation once it begins to raise interest rates.

Ten-year notes advanced for a second day and the yen strengthened against all of the 16 most-traded currencies after Bernanke said in an opinion article in the Wall Street Journal that the Fed was “confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate.”

Bernanke’s comments are “likely to be supportive for the U.S. debt market,” said Kenny Borowicz, a senior vice president at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options contracts.

The yield on the 10-year note fell two basis points to 3.59 percent as of 1:51 p.m. in Tokyo, according to data compiled by Bloomberg. The price of the 3.125 percent security due May 2019 rose 1/8, or $1.25 per $1,000 face amount, to 96 5/32.

The yen rose to 133.37 versus the euro from 134.05 in New York yesterday, when it fell to 134.76, the lowest level since July 3. Japan’s currency gained to 93.87 per dollar from 94.19. The greenback climbed to $1.4205 per euro from $1.4231.

The Fed will maintain “accommodative policies” aimed at reviving the U.S. economy for an “extended period,” including holding its benchmark interest rate near zero, Bernanke wrote. Yields indicate investors cut bets inflation will quicken.

The Fed chief is scheduled to begin his semiannual monetary-policy testimony to Congress today amid speculation he will seeking to reassure investors that policy makers will contain consumer prices as the economy recovers.

‘We Will Buy’

“I don’t expect inflation,” said Shun Totani, senior fund investor for Tokyo-based Asahi Life Asset Management Co., which handles the equivalent of $1.33 billion in debt. “If Treasury yields rise, we will buy.”

Yields in the range of 3.75 percent to 4 percent would be enough to purchase, Totani said. The 10-year note will yield 3.67 percent by year-end, according to a Bloomberg News survey of economists, with the most recent forecasts given the heaviest weightings.

Bernanke outlined a number of ways the central bank will be able to prevent the record reserves banks have accumulated from causing money supply and inflation to surge. Officials will use the interest rate on banks’ deposits with the Fed as a principal tool, which they can supplement with other means, including reverse-repurchase agreements and term deposits, he wrote.

Spread Narrows

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, narrowed to 1.87 percentage points from 1.89 percentage points yesterday, the first decline in a week. The spread has averaged 2.21 percentage points over the past five years.

The difference between two- and 10-year yields narrowed by one basis point to 2.62 percentage points, suggesting investors are willing to accept less to make long-term loans to the government as inflation concerns ease.

The yen and dollar rose against higher-yielding currencies after Bernanke signaled the central bank may eventually have to withdraw its expansionary policy to prevent inflation.

“A premature exit from the unorthodox monetary policy by central banks across the globe may drag down higher-yielding currencies,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third-largest bank. “The strength of these currencies was partly liable to the inflow of excessive liquidity that global central banks have been generating.”

Australian Dollar

Australia’s dollar fell 0.7 percent to 76.35 yen, New Zealand’s currency dropped 0.7 percent to 61.49 yen, and South Africa’s rand weakened 1.1 percent to 11.8989 yen.

Benchmark interest rates are 2.5 percent in New Zealand, 3 percent in Australia and 7.5 percent in South Africa compared with 0.1 percent in Japan and as a low as zero in the U.S., making the first three nations’ assets attractive to investors.

Japan’s currency also advanced from near a two-week low against the dollar on speculation Japanese exporters bought the currency after its 1.8 percent decline last week.

“Yen buying by Japanese investors, including exporters, picked up as the yen fell closer to the level they budgeted in their business plans,” said Soichiro Mori, manager of the foreign-exchange business promotion department at FXOnline Japan Co., a margin-trading company. “Such selling may become stronger as the yen approaches 95 yen.”

Japanese companies forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1.

Financial Crisis

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.51 trillion of writedowns and credit losses at banks and other institutions and sent the global economy into its first recession since World War II, according to Bloomberg data.

The Fed reduced its target for overnight bank lending to a range of zero to 0.25 percent in December, and it is buying $300 billion of Treasuries in a six-month plan that commenced in March. The central bank is scheduled to purchase notes due from May 2016 to May 2019 today as part of the program, according to its Web site.

Consumer prices tumbled 1.4 percent in June from a year earlier, the Labor Department said July 15. That means 10-year Treasuries offer a so-called real yield, or what investors get after accounting for costs in the economy, of 4.99. The real yield was 5.25 percent on June 10, the highest since 1994.