US Treasuries prices fell on Thursday after the Federal Reserve left benchmark interest rates on hold but played down a recent pullback in inflation, saying there was still plenty to worry about. The emphasis on stubborn consumer prices was not accompanied by any renewed concern over housing, despite the near-collapse of two mortgage-related hedge funds this month.
As market hopes for a possible interest rate cut this year were again dashed, benchmark 10-year notes dropped 6/32 and were offering a yield of 5.11 percent, up two basis points on the day.
"Clearly, the bias is not going to be a rate cut," said Giri Cherukuri, head trader at Oakbrook Investments in Lisle, Illinois. "They are worried about inflation, and that is what spooked the bond market."
Revisions to first-quarter data out earlier suggested the Fed's anxiety was not without merit. Core consumer prices, stripping out food and energy costs, were revised up to 2.4 percent from 2.2 percent, further above the Fed's presumed 1-2 percent comfort range.
"A sustained moderation in inflation pressures has yet to be convincingly demonstrated," the Fed said in the key sentence of its statement that resonated in the markets. The downward price movement reflected this nervousness, with two-year notes tumbling 3/32 for a yield of 4.95 percent, up four basis points. Rising stock prices compounded the drag on government debt.