Treasury yields fall

US Treasury yields fell on Wednesday after the Federal Reserve struck a dovish tone in acknowledging recent market volatility, but maintained an otherwise upbeat view of the US economy. "The committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation," the Fed's policy-setting committee said in a statement that diminished the chances of a rate hike at its next meeting in March.
The Fed removed a previous reference from its statement to the risks of the economic outlook being balanced. Instead, the central bank said it was weighing how the global economy and financial markets could affect the outlook. "This was a dovish statement," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin. "Language about the global environment will need to be removed before they hike."
US benchmark 10-year Treasury note yields fell to 2.00 percent, from 2.05 percent before the statement. The yield curve between five-year notes and 30-year bonds steepened to 138 basis points from 134 basis points. Treasury yields have fallen in the past month on safe-haven buying as stocks and oil prices dropped, partly due to a glut in supply and concerns over slowing growth and high corporate debt levels in China.
Falling expectations that a rate increase is likely at the US central bank's March meeting have also bolstered bonds. The Fed was careful, however, to keep open the possibility of a rate increase in March. "The Fed wants it as an option, you can't close the door on it by sounding extremely dovish," said Tom Porcelli, chief economist at RBC Capital Markets in New York. "The Fed did the right thing by not making any significant changes."
The US government had to pay more to sell $35 billion in new five-year notes on Wednesday, hurt by uncertainty before the Fed statement. The Treasury paid a high yield of 1.496 percent, around a basis point higher than where the debt was trading before the sale. The Treasury will sell $29 billion in seven-year notes on Thursday, its third and final sale of $90 billion in new coupon-bearing debt this week. The government also sold $15 billion in two-year floating rate notes on Wednesday.