Bonds Rally as Focus Shifts to Emerging Markets


U.S. Treasuries prices rose on Wednesday, with benchmark yields hitting two-month lows after the U.S. Federal Reserve's expected decision to trim its asset purchases as investors retrained their focus on weakness in emerging market economies.

The Fed announced a further $10 billion cut in its monthly bond purchases in a statement after its two-day policy meeting, reducing its monthly bond-buying to $65 billion per month starting in February.

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"The FOMC decision to taper came in as expected, so investors returned to the recent focus, which is the risk-off move," said Dion Chu, Treasury trader at Jefferies & Co. In New York.

In December, the Fed shrank its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $75 billion.

Weakness in emerging markets returned to investors' minds after the Fed statement, driving safe-haven bids for Treasuries. Turkey's interest rate hike during a midnight policy meeting to defend its battered lira currency did little to calm fears.

"I would be very hesitant to say that the worries in the emerging market economies have now dissipated," said Heather Loomis, West Coast director of fixed income at JP Morgan Private Bank in San Francisco.

Treasuries prices rose earlier in the day after investors sold riskier emerging market assets and bought safe-haven bonds in anticipation of a further Fed pullback.

A reduction in the Fed's bond-buying removes support from emerging market assets, which have benefited from investors' greater risk appetite in the face of low U.S. interest rates.

Treasury prices also rose despite incoming supply. The U.S. Treasury Department debuted $15 billion in two-year floating-rate notes to strong demand on Wednesday, and will sell $35 billion in five-year notes and $29 billion in seven-year debt on Thursday.

Benchmark 10-year Treasury notes were last up 17/32 in price to yield 2.69 percent. The yield hit a session low of 2.66 percent, the lowest in over two months. Bond yields move inversely to their prices.

The 30-year Treasury bond was last up 26/32 in price to yield 3.63 percent. The yield touched a session low of 3.61 percent, its lowest since late October.

The removal of uncertainty surrounding the Fed also left some investors to mull concerns surrounding the U.S. labor market and the upcoming debt ceiling debate, supporting gains in Treasuries prices.

Some investors are concerned that Washington won't raise the government's $16.7 trillion statutory borrowing limit before it is expected to be exhausted by early March, while weak U.S. December nonfarm payrolls data have fueled concerns over the near-term economic outlook.

"If we look beyond today's announcement, there are some things on the near-term horizon that are still a little bit of a worry," said Jim Sarni, managing principal at Payden & Rygel in Los Angeles.

The Commerce Department reported on Tuesday that orders for long-lasting U.S. manufactured goods fell by 4.3 percent in December, stoking worries about the U.S. economy and supporting bond prices.

On Wall Street, the three major stock indexes dipped, with the benchmark Standard & Poor's 500 stock index falling 1.02 percent to its lowest level since mid-November. The S&P 500 has fallen four of the past five sessions on fears about the turmoil in emerging markets spreading to other regions.