US Treasury prices fell on Wednesday after the Federal Reserve raised interest rates and suggested in its post-meeting statement that further tightening was likely. Particularly painful for bond bulls, the US central bank said that monetary policy remained accommodative even after the latest increase, indicating that more moves would be required to bring borrowing costs to a more neutral level.
Reflecting that possibility, futures markets were now pricing in an estimated 80 percent chance of a December rate hike.
"Clearly the tone and substance of this statement is leaning toward the possibility that they are willing - unless something really surprising happens - to come back and tighten again in December," said Steve Ricchiuto, chief US economist at ABN Amro. A Reuters poll of the top bond dealers on Wall Street taken after the Fed's policy committee announced a quarter-percentage point hike in the benchmark federal funds rate to 2.0 percent, found 13 of 20 dealers expect another increase next month, up from 11 dealers in last week's poll.
Still, bond investors were somewhat relieved that last month's solid increase in US payrolls did not prompt a more unambiguously positive tone from the Fed. The statement simply stated that labour market conditions had improved, preventing any serious haemorrhaging in Treasuries.
The notes, the third instalment in the Treasury's $51 billion refunding, went at a high yield of 4.28 percent and drew bids for only 2.02 times the amount on offer, well short of the lofty 2.9 achieved at the last refunding. The two-year note yield stood at 2.85 percent from 2.82 percent on Tuesday, leaving it about a quarter percentage from the start of last week. Yields on the new five-year note ticked up to 3.56 percent, having fetched 3.51 percent in a well received auction on Tuesday. The 30-year bond shed 8/32, taking its yield to 4.96 percent from 4.94 percent. The swift rise in short-term yields has seen the spread between them and 10-year yields narrow to 139 basis points, its lowest level since the emergency rate cuts of September 2001.
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