George Goncalves Comments: Bond Prices Little Changed After Fed Statement – Reuters Online

Reuters Online, December 17, 2009

U.S. Treasury debt prices were little changed on Wednesday after the Federal Reserve updated its view of economic conditions while affirming interest rates would remain low for an extended period. In its last policy statement of 2009, the Fed forecast subdued inflation but said conditions in the financial markets had grown more supportive of economic growth. "The statement is slightly more hawkish than expected. The FOMC chose to highlight the recent improvements in economic conditions," said Anna Piretti, a senior economist at BNP Paribas. "They recognize growth prospects are brighter…This is the first step in removing the policy stimulus, but it doesn’t mean they are about to raise rates." Treasury prices, which had earlier risen following a downgrade of Greece’s sovereign debt as well as fresh data showing low U.S. inflation, sank back to levels near Tuesday’s close.

Benchmark 10-year notes US10YT=RR were steady at 98-06/32. Their yield, which moves inversely to price, was 3.59 percent, unchanged from late Tuesday. The 30-year bond US30YT=RR rose 3/32 for a yield of 4.52 percent. The curve between two-year Treasury notes and 10-year bonds was back near its all-time highs, based on closing levels, reaching 276 basis points.

The Fed also restated its intent to pull back from the quantitative easing policies it created to stem the financial crisis. The central bank said most special liquidity facilities would expire Feb. 1 and that it would complete its longer term securities purchases by the end of the first quarter of 2010.

"This was already on the docket, but to bring that up now is symbolic in our opinion," said George Goncalves, the head of fixed income rates strategy at Cantor Fitzgerald in a note to clients. "Re-introducing a known fact at today’s statement is in a way the first steps of trying to differentiate monetary policy from balance sheet/liquidity policy."