U.S. Government Bond Prices Fall After Fed Announcement

By Akane Otani Features Dow Jones Newswires

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.

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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.

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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)