NEW YORK: US Treasury debt prices fell on Wednesday after the Federal Reserve offered no new monetary stimulus for now even though policy-makers acknowledged a recent slowing in the US economy and stubbornly high unemployment.
The US central bank did leave the door open to do more to help the economy in its latest policy statement but it was not prepared yet to embark on a third round of quantitative easing in the form of large-scale bond purchases, known as QE3, or to cut the interest it pays banks on excess reserves they deposit with the Fed.
Some traders had speculated the Fed might at least extend its near-zero interest rate pledge into 2015 from late 2014 after its two-day policy meeting.
"There were no signs of panic, none at all. Expectations for more QE, in the minority we suspect, were disappointed, and expectations for extending the forward guidance, in the majority, were also disappointed," said Eric Green, global head of rates and FX research/strategy at TD Securities in New York.
The latest FOMC statement initially brought a flurry of Treasuries purchases, briefly erasing the earlier losses on the 30-year bond, when traders had thought the Fed's downgraded outlook would result in more Fed stimulus.
But the market bounce soon faded when investors concluded Fed policy-makers need to see further deterioration in the economy, which is still growing, albeit at an anemic 1.5 percent clip in the second quarter.
"They don't like the trend, but they haven't seen the trend long enough to act," said Matthew Pallai, who co-manages the $982 million JPMorgan Multi-Sector Income Fund in New York. "It really shows how data-dependent the Fed has become."
Wednesday's US manufacturing data from the Institute for Supply Management, similar to other recent US economic data, fed the notion of a slowing US economy that warrants more Fed stimulus.
The ISM index on US manufacturing activity was stuck below the 50 threshold for a second straight month. A reading below means the factory sector is contracting.
However, a pair of reports on private employment and construction spending suggested the deterioration in the economy since the first quarter was not as severe as some feared.
On the open market, benchmark 10-year Treasury notes were 13/32 lower at 102-4/32 with their yields at 1.515 percent, up 4.5 basis points from late on Tuesday.
The 30-year bond was down 26/32 point in price at 108-16/32, yielding 2.588 percent, up 3.8 basis points from Tuesday's close, while the two-year note was down 1/32 with a yield at 0.235 percent, up 2 basis points from Tuesday.
With the FOMC statement out of the way, investors will turn to the European Central Bank whose policy-makers will convene on Thursday. They await to see whether ECB will take bold measures as hinted by its President Mario Draghi last Friday.
Draghi pledged the ECB will do whatever is necessary to save the euro zone, whose future is in doubt due to its festering debt crisis. His comments unleashed heavy selling in Treasuries, German Bunds and other safe-haven investments, pushing benchmark yields to three-week highs.
"Europe is more of a question than the US anyway," said JPMorgan's Pallai.
On the supply front, the Treasury Department as expected said it will sell a combined $72 billion in coupon-bearing debt next week as a part of its August refunding.
The sales of the $32 billion in three-year notes ; $24 billion in 10-year debt and $16 billion in 30-year bonds are expected to raise $17 billion in new money for the federal coffer. They will raise cash to refund investors on $54.2 billion worth of maturing government debt.
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