Treasuries Close Sharply Higher In Reaction To Fed Decision

(RTTNews) - After showing a lack of direction for much of the session, treasuries spiked higher going into the close of trading on Wednesday following the Federal Reserve's monetary policy announcement.

Bond prices showed a substantial move to the upside in late-day trading, closing firmly in positive territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled by 14.5 basis points to 2.708 percent.

With the steep drop on the day, the ten-year yield extended a recent downward trend, hitting its lowest closing level in over a month.

The rally by treasuries came on the heels of news that the Federal Reserve surprised most economists by refraining from scaling back its asset purchase program.

The Fed said it would continue to purchase bonds at a pace of $85 billion per month, noting that it decided to wait for more evidence that economic progress will be sustained before adjusting the pace of its purchases.

Looking ahead, the central said future decisions about when to moderate the pace of asset purchases will be based on whether incoming information continues to support the expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.

The Fed noted that the asset purchases are not on a preset course and their pace will remain contingent on the economic outlook and the assessment of the likely efficacy and costs of such purchases.

In remarks at a press conference, Fed Chairman Ben Bernanke suggested that the decision to maintain the asset purchase program was precautionary move due in part to a potential budget crisis in Washington.

Paul Edelstein, Director of Financial Economics at IHS Global Insight, said, "Given recent developments in interest rates and fiscal policy, the committee wasn't ready to pull the trigger. But we suspect that the bias on the committee remains against a long-lasting QE program."

"Barring a really bad outcome from the upcoming battles over fiscal policy in the fall and winter, we expect the Fed to taper at the December meeting," he added.

Trading on Thursday will continue to be impacted by reaction to the Fed decision, although traders are also likely to keep an eye on the release of reports on weekly jobless claims, existing home sales, and Philadelphia-area manufacturing activity.