U.S. Treasurys yields dropped on Wednesday to their lowest in over a month after the Federal Reserve said it would maintain its bond purchases at $85 billion a month, surprising investors who had expected it would reduce the size of its buying program.
Citing strains in the economy from tight fiscal policy and higher mortgage rates, the Fed decided against the tapering of asset purchases that investors had all but priced into stock and bond markets.
The statement caused a dramatic turnaround in Treasurys prices, which had weakened heading into the announcement.
"Obviously this was very surprising. There is no question that we were being set up for Fed tapering," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
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The Fed caught investors off guard. Many had been pulling out of bond funds on expectations of higher yields, while others have hedged bonds, mortgages and other holdings vulnerable to a rate spike as the Fed begins the long road of withdrawing its stimulus.
"People are completely underinvested," said Tom Tucci, head of Treasurys trading at CIBC in New York.
"It's the worst of all worlds in the sense that you just had a major liquidation and massive redemptions in bond funds, and now you have this huge rally and the Fed completely surprising people by not beginning this process," he said.
Benchmark 10-year notes were last up 1-12/32 in price to yield 2.69 percent, down from 2.86 percent before the statement and the lowest since Aug. 13.
Five-year notes gained 28/32 in price to yield 1.43 percent, down from 1.63 percent before the statement.
Thirty-year bonds rose 1-17/32 in price to yield 3.75 percent, down from 3.84 percent before the statement.