Treasuries Close Firmly Negative But Well Off Worst Levels

(RTTNews) - Extending a recent downtrend, treasuries moved lower on Wednesday but closed well off their worst levels as traders digested the Federal Reserve's monetary policy announcement.

After initially accelerating to the downside following the Fed statement, bond prices regained some ground going into the close. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, climbed 3.9 basis points to 2.323.

Treasuries moved steadily lower for much of the session as traders awaited the statement from the Fed following its two-day policy meeting.

As was widely anticipated, the central bank announced the conclusion of its asset purchase program, reducing its purchases of mortgage-backed securities and longer-term Treasury securities to zero from $15 billion.

The Fed also repeated its pledge to keep interest rates at record lows for "a considerable time" but said rates may rise sooner than markets expect if the economic recovery continues to gather steam.

In a more surprising move, the Fed said labor market indicators suggest that "underutilization of labor resources is gradually diminishing" after previously warning about persistent slack in the labor market. The central bank also said the likelihood of inflation running persistently below 2 percent has diminished even though inflation is likely to be held down by lower energy prices and other factors in the near term.

Minneapolis Fed President Narayana Kocherlakota was the lone dissenter, suggesting that the Fed should commit to low rates until the inflation outlook has returned to 2 percent and continue the asset purchase program at its current level.

Paul Ashworth, Chief U.S. Economist at Capital Economics, said, "On balance, the Fed believes it is getting closer to meeting the full employment side of its mandate, while it is not necessarily convinced it is losing ground in meeting the price stability side of its mandate."

"We would say that was, if anything, a slightly hawkish shift," he added. "It's also perhaps telling that it was the dovish Narayana Kocherlakota who dissented at this vote, whereas in previous FOMC meetings this year it is the hawks who dissented."

The announcement from the Fed largely overshadowed a disappointing auction of $35 billion worth of five-year notes.

The five-year note auction drew a high yield of 1.567 percent and a bid-to-cover ratio of 2.36, while the ten previous five-year note auctions had an average bid-to-cover ratio of 2.74.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

While reaction to the Fed announcement may continue to impact trading on Thursday, traders are also likely to keep an eye on reports on third quarter GDP and weekly jobless claims.

The Treasury Department is also due to sell $29 billion worth of seven-year notes, finishing off this week's series of long-term securities auctions.