U.S. Government Bond Prices Fall After Fed Announcement

By Akane Otani Features Dow Jones Newswires

U.S. government bond prices fell Wednesday after the Federal Reserve kept a December interest rate increase on the table and said it would start shrinking its asset holdings in October.

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The yield on the benchmark 10-year U.S. Treasury note increased to 2.273%, compared with 2.238% ahead of the announcement. Yields, which climbed for seven straight sessions through Tuesday, rise as bond prices fall.

Some analysts attributed the rise in yields to what they saw as a more hawkish stance from the Fed. The central bank is still expecting to raise rates again this year and sees three more rate increases next year.

The central bank "gave only passing mention to inflation outside of assuming it will return to the 2% level in the medium term," while continuing to leave near-term rate projections in place, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

Fears that the Fed will continue to raise rates despite lackluster inflation could keep pressure on the bond market in the near term,

The Fed also said it would begin unwinding its $4.2 trillion bond portfolio built up in the wake of the financial crisis in October. The decision had been widely expected by investors.

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Some investors and analysts said the Fed's next steps toward normalizing monetary policy are unprecedented -- raising the possibility of shocks in the debt market, similar to the 2013 "taper tantrum." Yet many say the central bank has telegraphed its moves clearly enough that the bond market's reaction is likely to be muted, at least initially.

Write to Akane Otani at akane.otani@wsj.com

U.S. government bond prices fell for an eighth consecutive session after the Federal Reserve indicated on Wednesday that it could raise rates again in 2017.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.276%, its highest close since Aug. 8, up from 2.239% Tuesday. Yields rise as bond prices fall.

Meanwhile, the yield on the two-year U.S. Treasury note, which tends to be more sensitive to market expectations for Fed policy, rose to its highest level since November 2008, settling at 1.442%, compared with 1.401% on Tuesday.

Bond yields had inched lower ahead of the Fed meeting, then jumped alongside the U.S. dollar after the bank suggested it is open to raising rates once more this year in December, and three times next year. The central bank also said in a widely expected announcement that it would begin shrinking its $4.2 trillion bond portfolio starting in October.

After the announcement, Investors and analysts sensed a greater chance of a rate rise, with federal-funds futures late Wednesday pointing to a roughly 68% chance of a rate increase by December, according to data from CME Group, compared with about 49% a week ago.

Disappointment that the central bank "gave only passing mention to inflation" while continuing to leave near-term rate projections in place likely accounted for selling in the bond market, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

A streak of muted inflation readings had made many skeptical of how quickly the Fed would be able to raise rates, although some investors revised their bets last week after data showed an unexpected acceleration in U.S. consumer prices.

Fears that the Fed will continue to raise rates despite lackluster inflation could keep pressure on the bond market in the near term, analysts say, although others believe the Fed is unlikely to move aggressively in normalizing monetary policy.

The central bank said Wednesday that it reduced its longer-term projection for its federal-funds rate. Fed officials now see a rate target of 2.8%, rather than 3%.

The move, analysts say, suggests the Fed will proceed cautiously.

"It's going to be a slow, slow climb," said Chris Gaffney, president of EverBank World Markets, adding that he sees the central bank moving slowly to prevent a market shock.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

September 20, 2017 16:35 ET (20:35 GMT)