U.S. Government Bond Prices Fall as Investors Await Fed Balance Sheet Shrinkage

By Daniel Kruger Features Dow Jones Newswires

U.S. government bond prices fell for a seventh day, the longest decline since March, as the Federal Reserve began its latest meeting.

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The yield on the benchmark 10-year U.S. Treasury note rose to 2.239%, from 2.230% Monday. Yields rise as bond prices fall.

Yields inched higher as investors anticipated the Federal Reserve will announce a plan to trim its balance sheet as part of its effort to return monetary policy to a noncrisis footing.

Traders were also analyzing reports that the European Central Bank is unsure of when to begin shrinking its EUR60 billion a month of bond purchases and that the Bank of Canada is concerned it may risk boosting its currency too much, threatening its own recovery.

Investors have focused on the impact that the Fed's expected decision may have on the prices of stocks and other financial assets. One of the Fed's objectives in pumping money into the economy through bond purchases was to boost spending and inflation by lifting securities prices. With that policy about to unwind, traders are anticipating the stock market could lose some of its momentum.

Central bankers "are very sensitive to pulling back the accommodation," said Thomas Tucci, head of Treasury trading at CIBC World Markets Corp. "They don't know what's on the other side."

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Some analysts said the Fed could try to soothe some of the sting from shrinking the money supply by adjusting its economic and market forecasts to reflect a more modest trajectory of future growth and signal a more gradual pace of policy tightening. Gennadiy Goldberg, a bond strategist at TD Securities in New York, said the central bank could revise some economic forecasts with a more-dovish outlook.

The Fed currently holds $4.2 trillion of bonds on its balance sheet. Policy makers have outlined a plan where the central bank would allow $6 billion of Treasurys and $4 billion of mortgage bonds to mature each month without reinvesting the proceeds in new securities. The Fed would then increase the size of its pullback in three-month intervals.

Investors and traders forecast the central bank will shrink its holdings by $1 trillion or more through this process. While the impact is expected to be modest at first, as it progresses it could become an increasingly potent brake on credit creation and economic growth, analysts said.

(END) Dow Jones Newswires

September 19, 2017 17:03 ET (21:03 GMT)