Short-Dated Bonds Slide After Fed Decision -- Update

By Min Zeng Features Dow Jones Newswires

A bout of selling hit U.S. government bonds maturing in 10 years or less after the Federal Reserve signaled that the door remains open for an interest-rate increase as soon as June.

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The Fed held short-term interest rates steady as widely expected by investors, following a rate increase in March. But in the rate statement, officials say slow growth earlier this year was "likely to be transitory."

Selling pressure hit short-dated Treasurys the most as their yields are highly sensitive to the Fed's rate policy outlook.

In recent trading, the yield on the two-year Treasury note was 1.302%, according to Tradeweb, compared with 1.282% right before the Fed statement and 1.262% Tuesday. Yields rise as bond prices fall.

The yield on the benchmark 10-year Treasury note rose to 2.316%, from 2.293% before the release and 2.296% Tuesday.

"June is still alive," said Mary Ann Hurley, vice president of trading in Seattle at D.A. Davidson & Co.

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Fed funds futures, used by investors to place bets on the Fed's interest-rate policy, showed 75% odds that the Fed would tighten policy by its June meeting, according to CME Group. The odds were 66% before the Fed statement and 70% Tuesday.

Data released earlier Wednesday showed solid jobs growth in the private sector and solid expansion in the service sector, which had weighed down bond prices.

The 30-year bond was the only maturity whose price strengthened on Wednesday. The bond's price got a boost as the Treasury suffered a setback in its idea of selling debt maturing in more than three decades.

The Treasury's Borrowing Advisory Committee, composed of representatives from some of the largest financial institutions that participate heavily in the bond market, told the Treasury that "the committee does not see evidence of strong or sustainable demand for maturities beyond 30-years."

The comment came as the Treasury released its latest quarterly refunding, which contains details about how to finance its debt. The Treasury said in the statement that it would continue to study longer-term debt, and provide an update at a future quarterly refunding. The longest maturity the Treasury sells to investors now is 30 years.

The news reduced some concerns over a ramp-up of long-term bond issuance any time soon, boosting demand for long-term debt.

"The door is not shut," but Treasury's Borrowing Advisory Committee "makes the Treasury difficult to pursue the idea given that TBAC represents the voice of investors," said Priya Misra, head of global interest-rate strategy at TD Securities.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

May 03, 2017 15:14 ET (19:14 GMT)