Treasuries Rally As Fed Indicates Interest Rates Will Remain Near Zero

Treasuries moved sharply higher over the course of the trading day on Wednesday, extending the upward move seen over the two previous sessions.

Bond prices initially gave back ground in reaction to the Federal Reserve’s monetary policy announcement but saw further upside going into the close.

Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled by 8.1 basis points to 0.748 percent.

With the steep drop on the day, the ten-year yield continued to pull back off the more than two-month closing high set last Friday.

The strength among treasuries came as the Fed indicated interest rates are likely to remain at current near-zero levels through 2022.

The Fed on Wednesday announced its widely expected decision to maintain the target range for the federal funds rate at zero to 0.25 percent.

The accompanying statement also reiterated that the Fed expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The economic projections provided along with the statement showed most Fed officials expect rates to remain at current levels through 2022, with only a couple predicting an increase in rates.

In his post-meeting press conference, Fed Chair Jerome Powell said the central bank is “not even thinking about thinking about raising rates.”

Powell also told reporters that it “remains an open question” whether targeting interest rates along the yield curve would usefully complement the Fed’s main tools.

Expectations that rates will remain at record lows come as the Fed projects real GDP to nosedive by 6.5 percent in 2020, as the ongoing public health crisis weighs heavily on economic activity.

However, the Fed’s projections call for real GDP to rebound by 5.0 percent in 2021 followed by a 3.5 percent jump in 2022.

Regarding the Fed’s asset purchase program, the central bank said it plans to increase its bond holdings at least at the current pace over the coming months but noted it remains prepared to adjust its plans as appropriate.

The Fed announcement largely overshadowed a Labor Department showing a modest decrease in consumer prices in the month of May.

The Labor Department said its consumer price index edged down by 0.1 percent in May after slumping by 0.8 percent in April. Economists had expected consumer prices to come in unchanged.

The dip in consumer prices came as lower prices for motor vehicle insurance, energy, and apparel more than offset increases in prices for food and shelter.

The report said core consumer prices, which exclude food and energy prices, also slipped by 0.1 percent in May after falling by 0.4 percent in April. Core prices were also expected to come in unchanged.

Trading on Thursday may continue to be impacted by reaction to the Fed announcement, although traders are also likely to keep an eye on reports on initial jobless claims and producer price inflation.

The Treasury Department is also scheduled to announce the results of its auction of $19 billion worth of thirty-year bonds.

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