U.S. Government Bonds Pare Loss After Fed's Rate Statement

By Min Zeng 

        U.S. Treasury bonds pared a price decline on Wednesday after the Federal Reserve refrained from signaling that they are ready to raise benchmark short-term interest rate in September.
        The Fed said in a statement at the conclusion of its two-day policy meeting that the labor market continued to improve. At the same time, however, it flagged a nagging concern about low inflation which is creating caution among officials and could convince them to delay.
        The Fed's ultra-loose monetary policy following the 2008 financial crisis has sent prices of many stocks and bonds to elevated levels, raising concerns whether financial assets could hold up once the Fed starts a tightening campaign for the first time in nearly a decade.
        "There is no clear signal for the Fed to raise rates in September," said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at the United Nations Federal Credit Union in New York. "The Fed wants to get off the zero ground but they still want to monitor data before tightening."
        Mr. Sullivan says he still expects the 10-year yield to gradually rise and potentially increase toward 2.75% by year-end. But he says the Fed's signal of a slow tightening cycle along with uneven global economic growth would contain the rise in the yield.
        In recent trading, the yield on the benchmark 10-year Treasury note was 2.275%, compared with 2.29% right before the Fed's statement, according to Tradeweb. The yield traded at 2.252% on late Tuesday. Yields rise as prices fall.
        The yield on the two-year note, among the most sensitive to changes in the Fed's interest-rate outlook, was 0.704%, compared with 0.712% before the Fed release and 0.67% Tuesday.
        The $12.7 trillion U.S. government debt market is imperative to not only the U.S. economic outlook but also to the health of global financial markets. The yield on the benchmark 10-year Treasury note is used to price a wide range of financing activities including mortgages, corporate bond supply and business loans.
        U.S. bond yields have risen in recent months as investors shed holdings on worries that higher interest rates from the Fed would shrink the value of outstanding bonds. But after rising to a nine-month intraday peak of 2.5% in June, the yield has fallen this month as falling commodities and China's stock market turmoil boost demand for safer assets.
        Many money managers don't expect the 10-year Treasury yield to rise sharply in an environment of sluggish global economic growth, still contained inflation and a low yield world with many other central banks either cutting interest rates or implementing asset purchases.
        Some investors say the Fed's go-slow approach in the new tightening cycle would also keep a lid on the rise in the 10-year bond yield, unless economic conditions change to push the central bank to tighten at a more aggressive pace than investors expect. Few investors expect the 10-year yield to rise to 3%--a level the yield last traded in early 2014--during the balance of the year.
        Write to Min Zeng at min.zeng@wsj.com
        (END) Dow Jones Newswires

        July 29, 2015 14:35 ET (18:35 GMT)

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