U.S. Treasury debt prices rose on Wednesday after Janet Yellen, who is likely to become the next Federal Reserve chief, reinforced the market's view that the central bank will maintain accommodative monetary polices for awhile longer.
In remarks prepared for delivery to the U.S. Senate Banking Committee on Thursday, Yellen said the U.S. central bank has "more work to do" to help an economy and a labor market that are still underperforming.
Yellen, the Fed's vice chair, has been nominated by President Barack Obama to succeed Chairman Ben Bernanke when his term expires in January. Investors will closely monitor her comments on Thursday for hints about future policy actions.
U.S. 10-year Treasury note yields dropped below 2.70 percent after Yellen's comments, while 10-year Treasury futures edged higher.
Benchmark yields had spiked higher after last Friday's jobs data raised speculation that the Fed may scale back bond purchases in December. But those expectations have eased and most analysts still do not expect a move until sometime in 2014.
"We've been unwinding some of those trades," said Kim Rupert, managing director of fixed-income analysis at Action Economics in San Francisco.
"A little bit of a short squeeze added to the bullish momentum, and I think a lot of this has been predicated on beliefs that Yellen will kind of maintain a very dovish Fed."
On the open market, benchmark 10-year notes climbed 20/32 in price, yielding 2.699 percent. On Tuesday, benchmark yields had hit their highest since mid-September.
U.S. 10-year Treasury futures last traded at 126-21/32 in price, up 24/32. The 30-year bond jumped 20/32 in price with a yield of 3.820 percent.
Fed officials who spoke publicly on Tuesday signaled that the economy, while showing some improvement, still needs support from the current level of stimulus.
The U.S. central bank has been buying $85 billion a month of Treasuries and mortgage-backed securities in a third round of so-called quantitative easing, aimed at lowering unemployment and achieving the Fed's target of 2 percent inflation.
"Now people are over-thinking this latest employment report. Are we close to tapering? I don't think so. Nothing fundamentally has changed," said Bonnie Baha, head of global developed credit group at DoubleLine Capital in Los Angeles.
Bernanke will speak about the central bank to teachers at an event in Washington at 7 p.m. EST (0000 GMT). At the same time, Atlanta Fed President Dennis Lockhart will give brief remarks at a local event.
Also on Wednesday, the Treasury sold $24 billion of 10-year notes at a high yield of 2.75 percent, with a bid-to-cover ratio of 2.70. Indirect bidders, a category that includes central banks, bought 47.7 percent, the biggest share since June.
The sale followed Tuesday's solid $30 billion three-year debt offering, which fetched the strongest bidding since March. The U.S. Treasury will complete this week's refunding with a $24 billion sale of 30-year bonds on Thursday.
In the meantime, the Fed bought $1.39 billion in Treasury Inflation-Protected Securities in the latest purchase for its QE3 program.
Benchmark yields have stayed in a 30-basis-point band since the Fed surprised investors two months ago by deciding not to taper its QE3 purchase program. Analysts anticipate this narrow trading will persist until there is more proof that the economy is breaking out of its sluggish pace of growth.
Few investors changed their Treasuries positions in the latest week, according to a survey from J.P. Morgan Securities released on Wednesday.
Nineteen percent of the firm's Treasuries clients surveyed in the week ended Nov. 12 said they held more longer-dated U.S. government debt than their portfolio benchmarks, the same amount as last week. On the other hand, 25 percent said they held fewer longer-dated Treasuries than their benchmarks, up slightly from 23 percent the previous week.
In "when-issued" activity, traders expected the upcoming 10-year note issue to sell at a yield of 2.759 percent. This was higher than the 2.657 percent yield at the 10-year note auction in October.
This week's coupon debt auctions were expected to raise $63.5 billion to repay investors for maturing federal debt they hold and $6.5 billion for the government.