US Treasury debt prices climbed on Thursday as investors shrugged off an interest rate increase from the Federal Reserve and appeared to bet the economy's future was less rosy than policy-makers suggested. A statement from the central bank following its policy meeting showed officials were rather optimistic about US economic prospects despite recent signs of softness in the face of soaring oil prices.
They raised interest rates a quarter percentage point as widely expected, bringing the federal funds rate to 3.25 percent, and signalled further tightening was in store.
Yet bond bulls seemed to be banking on the possibility that upcoming economic data would prove the Fed wrong.
Policy-makers did acknowledge the latest spike in energy costs, but removed language from its prior statement referring to a spending slowdown during the spring.
This optimism dashed hopes for an imminent pause in rate hikes, prompting a brief pullback in bonds. But in a testament to the market's resilience, prices bounced right back, with benchmark 10-year notes climbing 17/32 for a yield of 3.92 percent compared with 3.99 percent on Wednesday.
"The reaction of the bond market was kind of a chuckle," remarked Stephen Stanley, chief economist at RBS Greenwich Capital. "No matter what the Fed says about the economy or rates the market just keeps marching higher."
Also, there was relief in the market at data showing stability in one of the Fed's favoured inflation measures. This same report appeared to counter Fed officials' positive outlook for growth, with personal spending tapering off in May as consumers felt the pinch of higher gasoline prices.
But policy-makers seemed to be betting that oil prices would eventually ease, causing only temporary disruptions to economic expansion.
Such setbacks were certainly being felt heavily in the manufacturing sector, with Chicago-area factories showing only subdued growth in June and managers reporting staff reductions for the first time in a year.
Yet the sector represents only a sixth of total economic activity, and the Fed seemed to think the rest of the country could withstand the energy price shock without major damage.
Crude oil prices have retreated somewhat, trading around $56 a barrel on Thursday after hitting a record high just short of $61 earlier in the week. Bond bulls continued to defy the central bank's efforts to tighten borrowing conditions, pushing the 30-year bond an impressive 1-8/32 higher for a yield of 4.19 percent.
Five-year notes were up 9/32 and yielding 3.70 percent against 3.76 percent, while two-year notes edged up 1/32 to yield 3.64 percent against 3.67 percent.
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