US Treasuries were lower as traders parsed tweaks to the Federal Reserve’s policy statement regarding progress on the fight against inflation.
The slide in US government bonds pushed yields higher on Wednesday after Fed officials left interest rates steady, as expected. The policy-sensitive two-year yield was up as much as about five basis points to 4.25%, while 10-year rate rates rose four basis points before paring advances.
Swaps traders pared back their expectations for rate reductions this year, pricing in 43 basis points of cuts compared to 48 basis points prior to the Fed’s announcement. They see the first cut coming in mid-2025.
“This does not sound like a Fed that’s looking for the next opportunity to cut rates,” Bob Michele, JPMorgan Asset Management’s chief investment officer for global fixed income, said on Bloomberg Television.
As widely expected, policymakers left the federal funds rate band at 4.25%-4.5% and Fed Chair Jerome Powell reiterated that the central bank was in no hurry to lower rates further.
He also downplayed changes to officials’ policy statement, which no longer includes a reference to the Fed having made progress toward its 2% inflation goal.
Treasuries, which had been lower on the day even before the Fed’s announcement, slightly pared their moves on Powell’s remarks.
“Powell has eased some of the market angst over the change in the statement that seemed to give it a hawkish tint,” said Kim Rupert, an economist at Action Economics.
US government debt was set to post gains for the week, according to a Bloomberg index, with the complex up 0.6% so far this year through Tuesday’s close.
What Bloomberg strategists say...
“The bond curve flattened as the Federal Reserve removed its reference to inflation making progress toward its goal while stating that employment remains solid. Losing the relatively positive assertion on the inflation path was interpreted by investors as meaning the committee has less confidence it can achieve that goal in part due to Trump’s tariff policy boding well for curve flattening.”
— Alyce Andres, strategist.
For the bond market, focus remains squarely on whether — and when — the Fed will cut rates next.
While expectations for a March rate reduction had increased earlier this week during a tech-driven rout in stocks that fueled demand for Treasuries, the swaps market is now pricing only a narrow chance of a reduction.
Still, traders had ratcheted up bullish bets on Treasuries in the leadup to the meeting in hopes of a signal from the Fed that a move in March was on the table.
Wall Street economists, meanwhile, have diverged on their forecasts for the Fed’s policy path, though most have trimmed their expectations in recent months. Ahead of the January meeting, with only Morgan Stanley among major Wall Street banks that still saw a potential reduction at the next gathering in March.
The statement is “more positive on employment, more negative on inflation,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle. “Combined with pretty bullish positioning into the start of this week,” that’s why yields moved higher.
Many investors see long-term yields stuck in a range given widespread uncertainty over President Donald Trump’s policies, particularly with regard to tariffs.
“For the bond market, we think it’s a holding pattern for the next couple of quarters,” Guneet Dhingra, head of US rates strategy at BNP Paribas, said just ahead of the decision. “We think the Fed is on hold for the remainder of 2025.”
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Liz Capo McCormick
