Treasuries Close Sharply Higher In Reaction To Fed Minutes

(RTTNews) - After seeing modest strength for much of the session on Wednesday, treasuries accelerated to the upside following the release of the minutes of the latest Federal Reserve meeting.

Bond prices spiked sharply higher going into the close, ending the day firmly in positive territory. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled 7.9 basis points to 2.066 percent.

With the drop on the day, the ten-year yield gave back some ground after ending the previous session at its highest closing level in over a month.

The late-day rally by treasuries came as the minutes of the Fed's January monetary policy meeting were interpreted as dovish.

Traders seemed to focus on the statement that many participants said the balance of risks associated with policy normalization had inclined them toward keeping interest rates at lower levels for a longer time.

However, Paul Ashworth, Chief U.S. Economist at Capital Economics, argued that the statement could mean either a longer time than markets currently expect or a longer time than in a normal economic cycle

"If it's the latter, it is hardly news," Ashworth said. "After all, if the Fed was following its pre-crisis reaction function (Taylor rule), the fed funds rate would already be north of 2%."

"To our minds, the use of the past tense 'had inclined' pushes us more towards that latter interpretation," he added. "Either way, it is very poorly worded."

The minutes also showed that many participants worried dropping the "patient" language in the statement would result in a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates.

Participants subsequently discussed other ways to further underscore the data dependency of their decision regarding when to raise rates.

"The problem is that the Fed has only been able to qualify very vaguely what improvement in the data it is looking for," Ashworth said.

The minutes of the Fed meeting largely overshadowed a batch of disappointing U.S. economic data, including a report from the Commerce Department showing a bigger than expected drop in housing starts.

Reaction to the Fed minutes may continue to impact trading on Thursday, although traders are also likely to keep an eye on reports on weekly jobless claims, leading economic indicators and Philadelphia-area manufacturing activity.

Developments regarding the Greek debt negotiations may also be in focus, with Finance Minister Yanis Varoufakis expressing confidence an extension of Greece's loan agreement will be approved by Friday.