Bond prices sag as Bernanke signals less bond buy

By Karen Brettell and Richard Leong

NEW YORK (Reuters) - Treasuries prices slid on Wednesday as the Federal Reserve chairman suggested the U.S. central bank was prepared to reduce its bond purchases if its economic outlook proves correct, even though the U.S. economy remained stuck at a sluggish pace.

Bernanke's remarks at a new conference after a central bank policy-maker meeting confirmed traders' deepest worries that the dawn of near-interest-free money from the Fed might be approaching an end sooner than they had thought.

Fears about less Fed stimulus following by eventual hikes in short-term interest rates caused a flood of selling in Treasuries, with benchmark yields hitting 15-month highs and five-year yields rising to their highest levels since August 2011.

"He was definitely more hawkish than I or most people expected. What surprised me most was the Fed really downplayed the recent decline in inflation. I thought that would give them more pause than it did," said Thomas Graff, fixed income portfolio manager at Brown Advisory in Baltimore.

Bernanke drew a sharp distinction between less Fed stimulus and tightening monetary policy, but there were enough traders who were disappointed that the Fed chief did not backpedal on his comments about the possibility of reduced bond purchases almost a month ago.

Earlier, the Federal Open Market Committee issued a statement that it will keep its $85 billion monthly purchases of Treasuries and mortgage-backed securities for now. But the policy-setting group made no commitment it will continue at this pace at least until year-end, as some traders had hoped.

Benchmark 10-year Treasury notes fell 1-4/32 in price with a yield of 2.318 percent, up 13 basis points from late on Tuesday. The 10-year yield last traded at these levels in March 2012, according to Reuters data.

(Additional reporting by Karen Brettell, Steven C. Johnson; Editing by Kenneth Barry)