NEW YORK (Dow Jones)–Prices of Treasury securities rose mid-morning Wednesday following reassurance from the Federal Reserve Chairman Ben Bernanke that interest rates will stay low to support the economy and as U.S. new home sales unexpectedly plunged to a record low in January.

Bond prices hit session highs after Bernanke started his report on the economy and interest rate policy before the House Financial Services Committee at 10 a.m. EST even as $42 billion of five-year note supply looms at 1 p.m. EST.

Bernanke said the economy still needs ultra low interest rates and that the discount rate hike last week isn’t a sign of monetary policy shift. He noted that the job market is still week while inflation is likely to remain subdued for some time. Bernanke added that he is confident the Fed has tools necessary to tighten monetary policy with interest on bank reserves a key tool for exit strategy.

As of 10:12 a.m. EST, the two-year note was up 2/32 to yield 0.859%, the five-year note was up 4/32 to yield 2.326%, the 10-year note was up 7/32 to yield 3.663%, and the 30-year bond was up 11/32 to yield 4.609%. Bond yields move inversely to prices.

In recent speeches, Bernanke has put out more details about how to unwind trillions of dollars of monetary stimulus pumped into the economy over the past two years, but he has continued to suggest that the key interest rate–the federal funds target rate–will remain at record low levels near zero for a while to sustain an economic recovery.

“Fed policymakers are concerned about the excess liquidity, but must continue the low [interest rate] policy so we don’t have a `double dip’ in the economy like the 1930s,” said Michael Franzese, managing director and executive vice president of bond trading at Wunderlich Securities.

Many investors were spooked last week by a surprising increase in the cost of the Fed’s emergency loans to banks, known as the discount rate. The announcement raised concern that a hike in the federal funds target rate, the benchmark for short-term borrowing costs for banks, businesses and consumers, could come sooner than they anticipated.

The Fed’s move initially fueled selling in short-dated Treasurys, whose yields are the most sensitive to changes in the official rate outlook, but comments from several policymakers over the past few days have eased the concern a bit.

U.S. new-home sales unexpectedly plunged in January, setting a record low and erasing all gains made in the market during the past year as the economy recovers from recession. Demand for single-family homes fell 11.2% last month from the previous month to a seasonally adjusted annual rate of 309,000, the Commerce Department said Wednesday.

Economists surveyed by Dow Jones Newswires had estimated sales would rise 3.8%, to 355,000.

-By Min Zeng, Dow Jones Newswires; 212-416-2229; min.zeng@dowjones.com

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