[h=3]By CYNTHIA LIN[/h] NEW YORK—Treasurys retreated after the Federal Reserve committed to more stimulative bond purchases for next year.
The central bank's policy board announced the Fed will buy $45 billion in long-dated Treasurys each month, replacing a stimulus program expiring at year end, under which it bought the same amount of long-term Treasurys monthly but paired it with an equal amount of selling. Without the sales, investors regard the new purchases as a more aggressive easing measure.
The program was widely expected among bond investors, and the post-announcement selling in Treasurys came as investors flocked to the stock market. But stocks' post-Fed gains later fizzled.
By late-afternoon trading, Treasurys were at their lowest levels of the session. Benchmark 10-year notes fell 15/32 in price to yield 1.702%. The 30-year bond lost 1 6/32 to yield 2.898%, and two-year notes were flat to yield 0.246%. Bond yields rise when prices fall.
A wrinkle in the Fed's decision Wednesday came in the form of its policy communication, formerly tied to the mid-2015 calendar date for when it expects to make its first rate increase. Now, that guidance is linked to specific economic thresholds, with intentions to keep rates near zero if the unemployment rate is above 6.5%, so long as inflation expectations remain below 2.5%.
This prompted bond investors to try to calculate if these new parameters meant the Fed will increase the policy rate sooner or later than the mid-2015 timing. This resulted in some concerns that the central bank would have to start tightening policy earlier than anticipated.
"Given the employment number has come down by 0.6 in the last four months, it could be at 6.5% within eight months or by the end of summer," said Andrew Brenner, head of international fixed-income at National Alliance Capital Markets. "The market is not priced for this scenario, not even close."
Though bond managers are still digesting this new rate-policy regime, they agree that going forward, it puts an even heavier onus on the unemployment rate published every month in the nonfarm payrolls report. November results released last Friday showed a 7.7% unemployment rate.
With monetary policy now out in the open, bond traders say the fiscal debate in Washington will be the main driver of Treasurys for the rest of the year. Concerns about the fiscal cliff—a mix of government spending reductions and higher taxes that automatically take effect in the New Year—have left Treasurys in a tight trading range since early November.
While investors seek the safety of U.S. government bonds in case the economy does suffer the full impact from the fiscal cliff, they are also aware that Treasurys face a quick selloff if politicians surprise with a budget deal.
Jim Rice, head of taxable fixed-income trading at D.A. Davidson & Co., said optimism about the cliff can put Treasurys under pressure for now, but remains bullish on the market longer term. "Regardless of the outcome, it's going to be somewhat antigrowth," he said, adding that 10-year Treasury yields could sink toward 1.25% in the first quarter of next year.
Write to Cynthia Lin at [email protected]
The central bank's policy board announced the Fed will buy $45 billion in long-dated Treasurys each month, replacing a stimulus program expiring at year end, under which it bought the same amount of long-term Treasurys monthly but paired it with an equal amount of selling. Without the sales, investors regard the new purchases as a more aggressive easing measure.
The program was widely expected among bond investors, and the post-announcement selling in Treasurys came as investors flocked to the stock market. But stocks' post-Fed gains later fizzled.
By late-afternoon trading, Treasurys were at their lowest levels of the session. Benchmark 10-year notes fell 15/32 in price to yield 1.702%. The 30-year bond lost 1 6/32 to yield 2.898%, and two-year notes were flat to yield 0.246%. Bond yields rise when prices fall.
A wrinkle in the Fed's decision Wednesday came in the form of its policy communication, formerly tied to the mid-2015 calendar date for when it expects to make its first rate increase. Now, that guidance is linked to specific economic thresholds, with intentions to keep rates near zero if the unemployment rate is above 6.5%, so long as inflation expectations remain below 2.5%.
This prompted bond investors to try to calculate if these new parameters meant the Fed will increase the policy rate sooner or later than the mid-2015 timing. This resulted in some concerns that the central bank would have to start tightening policy earlier than anticipated.
"Given the employment number has come down by 0.6 in the last four months, it could be at 6.5% within eight months or by the end of summer," said Andrew Brenner, head of international fixed-income at National Alliance Capital Markets. "The market is not priced for this scenario, not even close."
Though bond managers are still digesting this new rate-policy regime, they agree that going forward, it puts an even heavier onus on the unemployment rate published every month in the nonfarm payrolls report. November results released last Friday showed a 7.7% unemployment rate.
With monetary policy now out in the open, bond traders say the fiscal debate in Washington will be the main driver of Treasurys for the rest of the year. Concerns about the fiscal cliff—a mix of government spending reductions and higher taxes that automatically take effect in the New Year—have left Treasurys in a tight trading range since early November.
While investors seek the safety of U.S. government bonds in case the economy does suffer the full impact from the fiscal cliff, they are also aware that Treasurys face a quick selloff if politicians surprise with a budget deal.
Jim Rice, head of taxable fixed-income trading at D.A. Davidson & Co., said optimism about the cliff can put Treasurys under pressure for now, but remains bullish on the market longer term. "Regardless of the outcome, it's going to be somewhat antigrowth," he said, adding that 10-year Treasury yields could sink toward 1.25% in the first quarter of next year.
Write to Cynthia Lin at [email protected]