Yields fall after Fed cuts growth, fed funds rate forecasts

NEW YORK: US Treasury yields fell on Wednesday after the Federal Reserve reduced its growth and federal funds rate forecasts, but said growth this year is still likely strong enough to support an interest rate increase later in the year.

After contracting in the first quarter, the economy is now on track to grow between 1.8 percent and 2.0 percent in 2015, according to the central bank's latest policy statement and new projections issued by Fed policymakers.

Policymakers' individual projections for the appropriate federal funds rate at year's end remained clustered around 0.625 percent. However, seven policymakers are now in favor of hiking rates only once or not all this year. In addition, Fed officials see slightly lower rates at the end of 2016 and 2017 than forecast in March.

"I look at the economic outlook as pretty dovish," said James Camp, managing director at Eagle Asset Management in St. Petersburg, Florida. "You might get a move in September but it is really a coin flip ... The short-end likes the statement and the long-end is weaker. That's lower for longer to me."

A stronger-than-expected jobs report for May has raised market expectations that the Fed will make its first rate hike in September, and some analysts and investors also see a second increase in December as likely.

But weakening productivity data and lower growth forecasts for the year have led others to push back expectations on when the Fed is likely to make its first rate increase.

Benchmark 10-year note yields fell to 2.32 percent from 2.39 percent before the Fed statement was released.

The yield curve between five-year notes and 30-year bonds steepened to 147 basis points, the steepest since May 22.

Few investors expected the Fed to commit solidly to an impending rate increase at this month's meeting as the central bank waits on further indicators on the strength of the US economy.

"I think we were expecting the statement to be mostly dovish, no real solid indication of a hike just an upgrade to their economic assessment, and that's generally what we got, nothing really surprising there. So the market rallied a bit on that," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York.

Treasuries have also been supported this week by concerns that Greece will default on its debt and leave the euro zone.

A warning by Greece's central bank that the country risked being driven from the euro zone and, ultimately, the European Union failed to break a deadlock with creditors before a potentially decisive meeting of European finance ministers.