US Treasury debt prices ended flat on Wednesday, paring earlier losses, as traders rolled back bets of an imminent interest rate increase from the Federal Reserve to combat inflation. Fed policy-makers, as expected, left key benchmark rates unchanged at 2.00 percent and raised their inflation concerns in a policy statement following a two-day meeting.
"The Fed is caught between a rock and a hard place for the next three to six months. There are weaker economic conditions and a slight uptick in inflation," said Michael Strauss, chief economist and market strategist at the Commonfund in Wilton, Connecticut.
Bonds briefly stumbled to session lows as traders focused on the more hawkish aspects of the statement from the Federal Open Market Committee. The yield on two-year Treasury notes, which are sensitive to the market's view on Fed policy, jumped above 3.00 percent shortly after the FOMC statement. But it closed flat on the day at 2.82 percent, as traders concluded a rate hike will not happen as early as they had feared.
According to interest rate futures, traders now see a 33 percent chance of the Fed raising rates in August, down from 48 percent before the Fed's rate decision. But they remain certain of a rate increase in September. Commonfund's Strauss predicted a rate pause into year-end. "The Fed will stay where it is for an extended period of time," he said.
Benchmark 10-year Treasury notes were trading 2/32 lower in price for a yield of 4.11 percent from a session high of 4.19 percent and from 4.10 percent late on Tuesday.
Prior to the FOMC statement, the bond market was stuck in negative territory on gains in the stock market and a weak but not dismal report on durable goods, analysts said. Appetite for equities sent major market indexes up as much 1.3 percent and curbed safety bids for low-risk government securities, they said.
Meanwhile, government data on US durable goods orders on Wednesday showed non-defence capital goods orders excluding aircraft, a closely watched proxy for business spending, fell by 0.8 percent last month, which was less than economists' forecast for a 1.4 percent drop.
The reading on business investment bolstered the case the economy could stave off a recession and the Fed's view that downside risks to growth "have diminished somewhat." Moreover, there was also selling of five-year notes as investors made room for $20 billion of supply on Thursday.
Five-year debt was trading up 1/32 in price for a yield of 3.53 percent from 3.54 percent late on Tuesday, but the 30-year bond was 2/32 lower for a yield of 4.66 percent from 4.65 percent.
In the derivatives market, two-year swap spread finished at 89.75 basis points tighter than 93.25 basis points late Tuesday, while 10-year spread ended at 69.75 basis points versus 70.75 basis points late on Tuesday.