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Longer-dated US Treasuries fared better than shorter-dated issues on Wednesday after the release of the minutes of the Federal Reserve's policy meeting in October signalled a likely glacial rise in interest rates once lift-off begins. This curve-flattening move is based on the view that after the US central bank ends its near-zero rate policy, shorter-term Treasury yields would rise faster than longer-dated ones.
Minutes of the October 27-28 meeting of the Federal Open Market Committee, the Fed's policy-setting group, also reinforced the notion that a December increase is likely if the economy improves further and markets stay stable. "The sooner the Fed raises rates, the shallower the rate path is going to be," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.
The yield premium on 30-year Treasuries bonds over five-year notes contracted to 1.35 percentage points, its tightest in 1-1/2 weeks. The 30-year yield was down 1 basis point at 3.033 percent, while the five-year's rose 2.5 basis points to 1.679 percent. Benchmark 10-year Treasuries were down 2/32 in price for a yield of 2.268 percent, up nearly 1 basis point.
Interest rates futures implied traders clung to a growing consensus view of a December rate hike, followed by a slow path for subsequent ones. "The greatest Christmas gift the Fed could give the market is certainty," said Steve Chiavarone, assistant portfolio manager at Federated Investors in New York. Prior to the release of the minutes, bond prices fell as dealers sold bonds to hedge the corporate debt supply they underwrite this week.
Companies have raised $21.4 billion of high-grade debt so far this week, according to IFR, a Thomson Reuters unit. Most traders shrugged off an in-line October report on US housing starts released earlier on Wednesday. Several top Fed officials on Wednesday reinforced the notion of a possible rate increase next month.
Atlanta Fed President Dennis Lockhart said at an event in New York he was "comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions." At the same event, Cleveland Fed President Loretta Mester said the US economy could handle a modest rate hike, while New York Fed President William Dudley said he doesn't expect "huge surprise" or a big market reaction when the Fed begins raising rates. Dallas Fed chief Rob Kaplan said accommodative monetary policy doesn't "necessarily mean a zero federal funds rate."

Copyright Reuters, 2015

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