Yields fall, curve steepens after Fed advocates ‘patience’

NEW YORK: US government bond yields fell on Wednesday, with the biggest losses in shorter-dated maturities, after Federal Reserve held interest rates steady but said it would be patient in lifting borrowing costs further this year as it pointed to rising uncertainty about the U.S. economic outlook.

Two-year yields, which reflect traders' expectations of interest rate hikes, fell to a two-week low of 2.52 percent. The benchmark 10-year yield fell slower, steepening the yield curve. The spread between the two- and 10-year yields rose to 16.9 basis points, its highest in a week.

"The statement was definitely dovish. In response, we've seen the Treasury curve steepen with two-year prices bid up," said Justin Lederer, Treasury analyst at Cantor Fitzgerald, referring to a policy statement from the Fed's rate-setting committee after a two-day meeting.

While the Fed said continued U.S. economic and job growth were still "the most likely outcomes," it removed language from its December policy statement that risks to the outlook were "roughly balanced" and struck language that projected "some further" rate hikes would be appropriate in 2019.

Since the FOMC's last hike in December, financial markets have been roiled by volatility, China and Europe have acknowledged slowing growth and U.S. consumer confidence has dropped along with home sales. Fed policymakers in response had begun to signal the possibility of a pause in rate hikes, with which the changes in Wednesday's language were consistent.

"We're not overly surprised by the statement given (Fed Chair Jerome) Powell's rhetoric since the last policy meeting. The balance sheet remarks were also in line with that sentiment," said Lederer.

Traders added to bets against further rate hikes, with short-term interest-rate futures swinging higher. The contracts continued to price in about a one-in-four chance of a hike this year, and a small but rising chance of a rate cut in 2020.

While softer U.S. housing data released Wednesday morning affirms that view, the continued strength of the labor market may make it difficult for the Fed to keep rates on hold.

U.S. private employers hired more workers than expected in January, the ADP National Employment Report on Wednesday showed.

The ADP data comes ahead of the more comprehensive non-farm payrolls report to be published Friday. The correlation between the two reports is erratic, so the former is not typically an effective predictor of the latter. The forthcoming non-farm payrolls report is expected to reflect an uptick in the unemployment rate due to the five-week federal shutdown which ended on Jan. 25.