Treasuries Move To The Downside Following Fed Announcement

(RTTNews) - After showing a lack of direction for much of the trading session on Wednesday, treasuries came under pressure following the Federal Reserve's monetary policy announcement.

Bond prices climbed off their worst levels going into the close but remained in negative territory. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 2 basis points to 2.977 percent.

Treasuries moved sharply lower after the Fed announced its decision to raise interest rates by 25 basis points to a range of 1.75 percent to 2 percent.

While the rate hike was widely expected, the Fed seemed to surprise investors by forecasting two additional rate hikes this year after previously predicting one rate increase.

"With growth rebounding following the typical first quarter soft patch, and inflation continuing to accelerate, we have been penciling in a total of four hikes for this year," said ING economist James Smith. "Looking at the latest 'dot plot,' it seems the Fed is increasingly heading in this direction too."

The Fed reiterated that it expects further gradual rate increases but dropped language predicting rates are likely to remain below levels that are expected to prevail in the longer run.

The central bank said data received since its May meeting indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.

Annual overall inflation and core inflation have moved close to 2 percent, the Fed said and noted indicators of longer-term inflation expectations are little changed.

On the U.S. economic front, the Labor Department released a report showing a bigger than expected increase in producer prices in the month of May.

The Labor Department said its producer price index for final demand climbed by 0.5 percent in May after inching up by 0.1 percent in April. Economists had expected producer prices to rise by 0.3 percent.

Excluding food and energy prices, core producer prices rose by 0.3 percent in May after edging up by 0.2 percent in April. Core prices had been expected to show another 0.2 percent increase.

The report said the annual rate of producer price growth accelerated to 3.1 percent in May from 2.6 percent in April, reaching its highest level in over six years.

The annual rate of growth in core producer prices also ticked up to 2.6 percent in May from 2.5 percent in the previous month.

"The rebound in producer price inflation in May supports our view that core consumer price inflation will trend higher over the rest of this year," said Michael Pearce, Senior U.S. Economist at Capital Economics.

He added, "That will keep the pressure on the Fed to keep raising interest rates once a quarter over the next year or so."

Trading on Thursday may continue to be impacted by reaction to the Fed decision along with reports on weekly jobless claims, retail sales, and import and export prices.