NEW YORK: US Treasury yields fell to more than eight-month lows on Thursday, and the yield curve flattened, as investors evaluated the Federal Reserve's moves to tighten monetary policy.
The US central bank on Wednesday took a more dovish tone than in its previous meetings, but stuck by a plan to keep withdrawing support from an economy it views as strong.
The Fed signaled "some further gradual" interest rate increases and no break from cutting its massive bond portfolio. Stock markets and benchmark Treasury yields slid after the Fed statement and a press conference by Fed Chairman Jerome Powell that followed.
"I think some were hoping to see a little bit more extreme statement changes, really downgrading the economic outlook or even having a more explicit tie to data dependency, or something like that," said Blake Gwinn, a US rates strategist at NatWest Markets in Stamford, Connecticut. "So maybe there was a little bit of disappointment there."
That said, "the reaction has been a bit extreme relative to what we got," Gwinn added. "Powell in his press conference sounded much more cautious and two-way than he has at any point in 2018."
Benchmark 10-year yields fell as low as 2.748 percent on Thursday, the lowest since April 4. The yields have fallen from a seven-year high of 3.261 percent on Oct. 9.
The yield curve between two- and 10-year notes flattened to 9 basis points, matching the difference in yields reached on Dec. 4, which was the narrowest since 2007.
Powell in late November said the key interest rate was "just below" neutral, a level that neither boosts nor brakes the economy, increasing speculation that the US central bank might pause hikes sooner than previously expected.
Fresh economic forecasts released on Wednesday showed policymakers expect two rate hikes next year, a reduction from three hikes projected by the Fed in September.
Much of the rate reaction to the Fed statement may have been driven by safety buying as stocks fell, and by investors buying bonds for year-end portfolio rebalancing.
"There may have been some investors who either had to add duration into year-end, or were holding off on portfolio moves until the Fed cleared out of the way, that may have come into the market after the Fed cleared," Gwinn said.
With the Fed out of the way, trading volumes are expected to decline into the Christmas and New Year holidays, when many traders will be on vacation.
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