Treasuries Fluctuate Following Fed Announcement But Close Modestly Higher

After an early move to the upside on Wednesday, treasuries saw considerable volatility following the Federal Reserve’s monetary policy announcement but managed to remain in positive territory.

Despite pulling back well off the best levels, bond prices finished the day modestly higher. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, slipped 1.6 basis points to 4.349 percent.

The early strength among treasuries partly reflected bargain hunting after the ten-year yield reached its highest levels in over fifteen years on Tuesday.

Buying interest waned after the Fed announced its widely expected decision to leave interest rates unchanged but raised its forecast for rates at the end of next year.

The Fed said it decided to maintain the target range for the federal funds rate at 5.25 to 5.50 percent after raising rates by 25 basis points in July.

However, the central bank’s latest projections suggest Fed officials expect one more rate hike this year, forecasting a median rate of 5.6 percent by the end of 2023.

While the forecast for the end of the year was unchanged from June, the latest projections also indicate officials expect rates to remain higher for longer than previously anticipated.

The forecast for rates at the end of 2024 was raised to 5.1 percent from 4.6 percent in June, while the outlook for rates at the end of 2025 was increased to 3.9 percent from 3.4 percent.

Expectations for rates to remain higher for longer may reflect an improved assessment of the economy, with the Fed’s statement saying economic activity has been expanding at a “solid pace” compared to the “moderate pace” described in July.

The Fed’s next monetary policy meeting is scheduled for October 31-November 1, with CME Group’s FedWatch Tool currently indicating a 70.1 percent chance rates will remain unchanged and a 29.1 percent chance of a quarter point rate increase.

“While this meeting was widely viewed as a ‘skip’ meeting, we think it still remains to be seen if another hike is in the cards later this year,” said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management. “Fed officials appear to be divided on whether higher policy rates are needed to bring inflation back down to their 2% target.”

“In addition, there are significant risks to the economy on the horizon with the autoworkers strike in motion and the potential for a government shutdown looming,” he added. “Both these events could sideline the Fed from another hike this year.”

Trading on Thursday may continue to be impacted by reaction to the Fed announcement, while reports on weekly jobless claims, existing home sales and Philadelphia-area manufacturing activity may also attract attention.

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