Treasuries move higher

US Treasuries debt prices rose on Wednesday after the Federal Reserve pledged to keep short-term interest rates near zero at least until late 2014, a substantially longer time period than markets had expected.
The US central bank also adopted an inflation target for the first time. Its 2 percent inflation goal is above what it expects the economy could achieve this year through 2014, as high unemployment and a struggling housing sector continue to worry Fed policymakers.
"It's mind-blowing," said Krishna Memani, director of fixed income at OppenheimerFunds in New York. "The Fed statement was far more dovish than anyone had expected." As a result of the Fed's latest move to help the economy, intermediate Treasuries enjoyed their best one-day gain in more than two months, with the five-year note yield within striking distance of its all-time low.
Not surprisingly, short-term interest rates suggest traders now expect the Fed's first rate hike would not occur until the last quarter of 2014. The Fed's decision to delay a rate hike intensified bids for medium-term Treasury issues, whose prices were already rising on a robust $35 billion five-year note auction.
The yield on five-year notes touched 0.763 percent, within a hair of the intraday record low of 0.762 percent set in September. The US Treasury Department will auction $29 billion of seven-year debt at 1 pm (1800 GMT) on Thursday. Traders expect strong demand for the offering, the last of this week's $99 billion in coupon-bearing supply, in the wake of the bond-friendly stand from the Fed.
Bond prices came off their initial highs as profit-taking emerged and some investors pulled money from longer-dated bonds and put it into stocks and other riskier assets. While a climate of low rates and low inflation supports bond values, it encourages investors to raise their stakes on higher-returning assets, said Russ Koesterich, global chief investment strategist at iShares in San Francisco. "The bottom line is that people would rationally move out the risk spectrum," he said.
The rotation into risky assets hurt the 30-year bond the most. It ended down 2/32 in price to yield 3.15 percent after rising as much as 2 points earlier. Benchmark 10-year Treasuries notes closed up 18/32 in price after rising more than 1 point. Their yield ended at 2.00 percent, matching the Fed's inflation target and down more than 7 basis points on the day.
Hedge funds accounted for 14 percent of the day's trading volume, nearly double their recent averages, according to Tradeweb. Since the Fed's inflation forecasts are running somewhat below its target of 2 percent, some traders bet that the Fed's commitment to an ultra-loose policy could fire up inflation down the road. That view increased the appeal of inflation bonds.
The 10-year break-even rate, which gauges traders' inflation expectations, rose on the day. The yield gap between 10-year Treasury Inflation-Protected Securities and regular 10-year Treasury notes finished at 2.12 percent, up 4.5 basis points from late Tuesday. The Fed's latest attempt to stimulate the economy surprised traders, as recent data has generally been better than expected even with the festering debt problem in Europe.