Treasuries Close Sharply Higher In Reaction To Fed Statement

(RTTNews) - Treasuries moved sharply higher during trading on Wednesday in reaction to the Federal Reserve's latest monetary policy announcement.

After seeing modest strength for much of the day, bond prices accelerated to the upside following the Fed statement. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled by 10.1 basis points to 1.724 percent.

With the substantial drop on the day, the ten-year yield ended the session at its lowest closing level in well over a year.

The rally by treasuries came as the Fed left interest rates unchanged and reiterated its pledge to remain patient in beginning to normalize monetary policy.

The promise to remain patient came even though the Fed upgraded its assessment of the economy, saying that activity has been expanding at a solid pace since its December meeting.

While the Fed also said inflation is expected to decline further in the near term, the central bank still expects inflation to rise gradually toward its 2 percent target over the medium term.

The jump by treasuries was also partly attributed to remarks by the Fed indicating that it will include international developments as part of its assessment of when to raise interest rates.

Chris Low, chief economist at FTN Financial, said, "The Fed is as determined to raise rates as ever, though the nod to international developments suggests the FOMC might delay rate hikes for a time if the global economy is in full-blown crisis mode."

The Fed statement largely overshadowed the results of the Treasury Department's auction of $26 billion worth of two-year notes, which attracted strong demand.

The two-year note auction drew a high yield of 0.540 percent and a bid-to-cover ratio of 3.74, while the ten previous two-year note auctions had an average bid-to-cover ratio of 3.36.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Reaction to the Fed statement may continue to impact trading on Thursday, although traders are also likely to keep an eye on reports on weekly jobless claims and pending home sales.

Bond trading could also be impacted by the results of the Treasury's auctions of $35 billion worth of five-year notes and $29 billion worth of seven-year notes.