US bond prices fall
US Treasuries prices traded down on Wednesday as Federal Reserve policymakers said downside risks to the economy had lessened, a more hawkish observation than markets had expected. Concluding a two-day meeting, the Fed extended its $85-billion-per-month bond buying program in a continued bid to prop up the world's biggest economy.
Copyright Reuters, 2013
But analysts noted that Fed policymakers removed a reference to tighter financial conditions.
"It was much less dovish than was expected, which is why we saw the reaction in markets," said Tom Porcelli, chief US Economist at RBC Capital Markets in New York.
Treasuries pared early gains to trade lower after the Fed statement. The benchmark 10-year note fell 8/32 to yield 2.534 in the afternoon, compared with a yield of 2.507 percent late Tuesday.
The 30-year bond also gave up early gains to fall 11/32 in price, yielding 3.640 percent. That compared with a yield of 3.621 percent late on Tuesday.
However, the Fed also nodded to a recent fiscal policy fight that likely damaged the economy in the fourth quarter. The federal government shut down in the first half of October as congressional Republicans sought to undermine President Barack Obama's signature healthcare law as a condition of funding the government.
Due to that shutdown, "any improvement with the data will be viewed with skepticism and any disappointing data will be pinned on the shutdown," said Neil Dutta, head of US economics at Renaissance Macro Research in New York.
"March is the most likely for them to dial back on the QE program," he said, referring to the Fed stimulus, known as quantitative easing. "The more important question in 2014 for the Fed is at what point they will adjust their rate guidance?"
Recent data show the critical labour and housing sectors had already slowed even before the shutdown in the first half of October, adding support to views that the Fed will not be ready to let the economy stand on its own for months.
Analysts say the Fed remains frustrated by the persistent sluggishness in the labour market despite three rounds of quantitative easing that has tripled the size of its balance sheet and resulted in almost five years of near-zero interest rates.
Payroll processor ADP said on Wednesday US companies added 130,000 workers in October, 20,000 fewer than economists had forecast. Just four months earlier, they expanded their payrolls by about 190,000.
Some analysts said that with the Fed staying the course, Treasuries are likely to remain rangebound for a while.
"It would take something dramatic from here, perhaps a much better-than-expected holiday season, for rates to go higher," said Paul Montaquila, vice president, fixed-income investment officer, at Bank of the West's capital markets division in San Francisco.
"We will be in this trading range for quite some time, with 2.5 percent on the 10-year yield being the mean and a range of about 2.35 percent to 2.75 percent."
In addition, the US Treasury sold $29 billion in seven-year debt at a high yield of 1.870 percent on Wednesday.
The auction drew a strong bid-to-cover ratio at 2.66, compared with an average of 2.51 in the last four auctions. The government sold $32 billion in two-year notes and $35 billion in five-year debt in the previous two days to steady, if unspectacular, demand.