US Treasury falls

US government bond prices dropped on Wednesday after the Federal Reserve held interest rates steady and signalled to investors its main concern was that inflation would fail to moderate. The Fed held the benchmark federal funds rate target unchanged at 5.25 percent as expected.
In its accompanying statement, the Federal Open Market Committee said core inflation remained somewhat elevated. "Inflation is obviously what they are concerned about and they haven't changed that really at all. That's why the bond market is getting hit," said Beth Malloy, bond market analyst, with Research Company, Briefing.com in Chicago.
Many bond investors had expected the central bank would acknowledge the softening in some recent US inflation data. "I think people were looking for either a neutral bias or a change in the language that may have been slightly more dovish particularly with respect to inflation," said John Miller, head of fund management of Nuveen Investments in Chicago. But bonds sold off when the statement did not show such a change in wording, Miller said.
After the US central bank announcement, interest rate futures pared back perceived chances of a Fed rate cut to a single 25 basis-point cut in the fourth quarter. The two-year note - which responds closely to expectations for central bank interest rate moves - traded down 3/32 in price for a yield of 4.73 percent, versus 4.67 percent before the decision and compared with 4.68 percent late on Tuesday.
"There has been far too much enthusiasm built up for the idea the Fed is going to cut rates but it is just a question of when," said Donald Coxe, global portfolio strategist for BMO Financial Group in Chicago. "This unanimity of opinion is wrong because we are getting rising inflation pressures," he said.
The 30-year bond, which is particularly sensitive to inflation pressures, fell 17/32 in price for a yield of 4.84 percent, versus 4.80 percent late on Tuesday.
The benchmark 10-year note's yield was at 4.67 percent, versus 4.64 percent before the rate decision and statement and compared with about 4.62 percent at the start of the session. Bond yields and prices move inversely. US interest rate swap spreads over Treasuries narrowed modestly with the 10-year swap spread edging in to 54.25 basis points shortly after the announcement from 54.75 basis points just before.
Earlier in the session before the Fed announcement, recent and upcoming supply in longer dated issues had weighed modestly on long maturities prices. On Tuesday, the Treasury sold $13 billion of 10-year notes and on Thursday it will auction $5 billion in 30-year bonds.