US Treasury prices fell sharply on Wednesday as investors interpreted a wording change in the Federal Reserve's policy statement as bringing the central bank one step closer to hiking interest rates.
The Fed left interest rates steady as expected after its two-day policy meeting, but surprised many by reneging on its promise to keep rates low for a "considerable period."
Instead, the central bank said it could be "patient in removing its policy accommodation," thus sending an unprepared market into a tailspin.
Yields on the two-year note, the most sensitive to market thinking on monetary policy, spiked higher as analysts scaled back their forecasts for the timing of a first rate rise. It was the biggest one-day jump in two-year yields since mid-October, and short-term interest rate futures also fell sharply.
Perhaps a minuscule alteration to outside observers, the Fed's word change was a big deal to analysts accustomed to dissecting central bank statements and looking for meaning in its every period and every comma.
The debate raged on about whether the shift was simply the result of an internal struggle at the central bank or whether it in fact signalled an increased propensity to lift interest rates sooner than later.
"This seems like a baby step toward tightening," said Drew Matus, financial markets economist at Lehman Brothers. "However, it does not alter the fundamental outlook, which is that that the Fed is not in any hurry to raise rates."
"It seems more like a bone to those who were upset with the 'considerable period' language than a sea change in thinking at the Fed," said Matus.
After a severe knee-jerk drop in prices immediately after the release of the statement, bonds recovered a little ground but remained well into the red in late afternoon trade.
The benchmark 10-year note was down 20/32, nudging yields up to 4.17 percent from 4.09 percent late on Tuesday. The 30-year bond dropped 28/32, to yield 5.00 percent.
Five-year notes slid 19/32 to yield 3.18 percent, up from 3.05 percent. The two-year lost 9/32, driving its yield to 1.79 percent from 1.65 percent.
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