Ten-year yield hits 14-month low after Fed signals no hikes in 2019

NEW YORK: US Treasuries rallied on Wednesday, taking the benchmark 10-year yield to a 14-month low, after the Federal Reserve said it would hold interest rates steady and its policymakers abandoned projections for further rate hikes this year while flagging an expected economic slowdown.

In a major shift in its perspective, the U.S. central bank also expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.

The two-year Treasury yield, which is a proxy for investor sentiment about interest-rate hikes, logged its largest daily drop since Jan. 3 and was last at 2.402 percent. The benchmark 10-year yield, which reflects investor sentiment about the overall health of the economy, fell by as much as 8 basis points to the lowest since January 2018 and was last at 2.539 percent.

The change in the Treasury market was significant enough that yields on two-, three-, five- and seven-year notes were below that of short-dated three-month bills, which last returned 2.464 percent.

The U.S. bond market's gauges on investors' inflation views also turned higher on Wednesday. The yield spread between 10-year Treasury Inflation Protected Securities and regular 10-year Treasuries was 1.971 percent, which was near its highest level since early December. This was nearly 2 basis points higher from late on Tuesday, Tradeweb data showed.

The Fed also said it would slow the monthly reduction of its Treasury bond holdings from up to $30 billion to up to $15 billion beginning in May. It said it would end its balance sheet runoff in September provided the economy and money market conditions evolved as expected.

"(The statement) definitely skewed on the dovish side of expectations. The main surprise is that the Fed projects zero hikes in 2019. Whereas our broad expectation, and the expectation of consensus, was for them to leave in at least one hike in 2019," said Evan Brown, head of macro asset allocation strategy at UBS Asset Management.

"There's one hike projected for 2020 but there's a long time between now and then and so the market is effectively taking the view that the Fed is done tightening."

In January, the Fed pivoted after hiking rates four times in 2018, pledging patience before making further moves. In February, Fed Chair Jerome Powell also said the central bank would stop shrinking its balance sheet later this year.