Treasuries Close Sharply Lower Following Fed Announcement

(RTTNews) - After drifting lower for much of the trading session on Wednesday, treasuries accelerated to the downside following the Federal Reserve's monetary policy announcement.

Bond prices pulled back sharply going into the close, ending the day firmly in negative territory. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, jumped 9.1 basis points to 2.772 percent.

The steep drop by treasuries came on the heels of the Fed's policy announcement, the first under new Fed Chair Janet Yellen.

As was widely expected, the central bank announced its decision to scale back its asset purchase program by another $10 billion to $55 billion.

Traders were more surprised by a revision to the Fed's outlook for the federal funds rate, with the median forecast now calling for rates at 1 percent by the end of 2015.

The projections provided after the December meeting had a median forecast of 0.75 percent at the end of next year. The projection for 2016 was also upwardly revised to 2.25 percent from 1.75 percent.

With regard to the outlook for interest rates, the Fed also dropped its 6.5 percent unemployment target in favor of a broader range of indicators.

The Fed said its assessment of when to begin raising rates will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

"The latest FOMC statement resounds like a mea culpa from the Fed," said Gregory Daco, lead U.S. economist at Oxford Economics. "The Fed believes that the economy is strong enough to be gradually weaned off of asset purchases."

"However, it believes that despite the progress in the unemployment rate, the rest of the economy does not appear to have gained the sufficient strength to remove its crutches and raise the fed funds rate," he added.

Daco said he expects the Fed to continue pursuing its efforts to untie tapering from "rate hiking" and predicted that the central bank will begin raising rates around mid-2015.

Trading on Thursday may continue to be impacted by reaction to the Fed statement, potentially overshadowing the release of a slew of U.S. economic data on weekly jobless claims, existing home sales, and Philadelphia-area manufacturing activity.