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US Treasuries were little changed late on Wednesday after the Federal Reserve raised interest rates, as expected, but did not rule out further monetary tightening.
The Fed's failure to guarantee at least a pause in its 22-month-long stretch of credit tightening sent bond prices lower immediately after the Fed raised the federal funds target rate by a quarter percentage point to 5 percent and released its policy statement.
But Treasury prices subsequently recovered some of those losses, responding to the Fed's message that it expected the gradual cooling of the housing market and the lagged effects of higher interest rates and energy prices to moderate economic growth.
"The market got hammered at first because the Fed retained the phrase that 'some further policy firming may yet be needed,'" said Chris Rupkey, vice president and senior financial economist at Bank of Tokyo/Mitsubishi.
But when bond investors read that the extent and timing of any such firming would depend "importantly" on the evolution of the economic outlook as implied by incoming data, the market reversed some of those losses, Rupkey said.
"The Fed has left it entirely open ended and cautioned the market to watch the data," said Gregory Miller, chief economist at SunTrust. "We've shifted now from the concept that one meeting means one rate hike."
The Fed's statement conveyed "a complete lack of a bias," rather than a dovish or hawkish stance, said Drew Matus, senior financial economist at Lehman Brothers.
"June is in play for a rate hike," he said. "It depends on what will be going on with the economy. This was very much an agnostic statement that tells us we are slaves to the fortunes of the economy and inflation." Thomas Atteberry, portfolio manager at Los Angeles-based First Pacific Advisors which has $2.3 billion in fixed-income assets under management, said if the two-year note yield remained below 5 percent, it could reflect a market perception that the Fed has finished tightening credit for a while.
A narrower difference between two- and 10-year yields could also indicate that some investors "are buying the 'inflation is contained' scenario," Atteberry said.
In late trade, two-year notes which respond closely to market expectations for Federal Reserve monetary policy moves - were down 1/32 in price, their yields having risen to 4.99 percent from 4.94 percent shortly before the announcement and 4.97 percent late on Tuesday. Bond yields move inversely to their prices.
Benchmark 10-year notes yielded 5.13 percent, unchanged from late on Tuesday, but up from 5.10 percent before the Fed announcement. The 30-year bond was up 4/32 in late trade, having halved a gain scored before the Fed announcement. The bond yielded 5.19 percent, having eased slightly from 5.20 percent late on Tuesday.
Five-year notes slipped 1/32 in price, their yield rising to 5.02 percent from 4.98 percent before the Fed announcement and 5.01 percent late on Tuesday.

Copyright Reuters, 2006

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