U.S. Treasury prices cratered on the two- and five-years with the 10-year chasing behind while the long bond outperformed (but hardly budged) following the Federal Open Market Committee (FOMC) statement. Also an influence were the Summary of Economic Projections (SEP) and plans for rate-normalization to begin in October.
The two-year took the brunt of the sell-off, swinging back to the lowest levels since October 2008 as Fed Chair Janet Yellen as much as promised another 25 basis point rate hike in December. The market boosted the odds for a year-end increase, but aren’t all in, with CME Group fed funds futures running inside 68% versus 39% a month ago. The Fed kept rates on hold, as expected, while indicating the labor market remained strong and growth is moving along. The Fed expects inflation to remain “somewhat” below the 2% target near term, but reach that objective in the medium term. The recent hurricanes were seen boosting inflation temporarily, but were not expected to have much impact on the medium term.The Fed expects near-term inflation to remain “somewhat” below the 2% target, but hit the goal medium term.
The 30-year yield settled near 2.822% from a 2.8357% high, 2.7934% low and 2.814% close Tuesday. The 10-year yield went out near support at 2.276% against a 2.2873% high, 2.2262% low and 2.243% close. The five-year yield was near 1.885% from a 1.896% high, 1.8108% low and 1.836% close. The two-year yield settled near 1.445% having screamed to tag 1.475% from a 1.3726% low and 1.401% Tuesday.
The curve trade flattened with the two- and 10-year yield spread, trading near 83.1 from 84.2 while five- and 30-year yield gap tightened to 93.7 from 97.9.
The FOMC balance sheet reduction plans offered no added news. The dot-plot projections were tweaked lower, as expected, with lower-end estimates for the long-run fed funds rate outlook were revised lower to 2.5%-3.0% versus 2.8%-3.0%. Estimates for 2020 were added, with the low-end of the central tendency forecast rates at just 2.5% by 2020.
Thursday’s calendar offers the initial weekly jobless claims and September Philadelphia Fed manufacturing data at 8:30 a.m. ET, the July Federal Housing Finance Agency (FHFA) house price index (HPI) at 9 a.m. with the August leading economic indicators out at 10 a.m.
Treasury will offer details on Monday’s three- and six-month bill auctions at 11 a.m. along with those for next week’s two-, five- and seven-year auctions. There will be $11 billion reopened 10-year Treasury Inflation Protected securities (TIPS) on sale at 1 p.m.