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Treasurys Add to Losses After Fed Announcement

U.S. Treasury debt prices slipped on Tuesday after the Federal Reserve held its fed funds target rate steady at 2 percent, as many bond investors had expected.

The Federal Open Market Committee said in its accompanying statement that although it expected inflation to moderate later this year and next, the outlook remained "highly uncertain."

The benchmark 10-year Treasury note's price, which moves inversely to its yield, traded down 5/32 for a yield of 3.99 percent, versus 3.98 percent shortly before the rate decision and statement and versus 3.97 percent late Monday.

Bonds fell earlier Uas rising stocks drew bids away from safe-haven bonds.

Oil's earlier dip below $120 per barrel eased some fears about the effects of high energy costs on U.S. consumers, who account for about two thirds of economic activity, and stoked investor interest in riskier stocks to the detriment of government bonds, analysts said.

"Higher energy prices are definitely sapping the consumer," said Doug Bender, managing director with McQueen, Ball & Associates in Bethlehem, Pa. "Psychologically, oil's fall is a relief," he said.

Treasury yields remained within the past two weeks' ranges, with the 10-year note just below 4 percent. A service sector report that was less dismal than expected from the Institute for Supply Management pushed bond prices somewhat lower, but losses were checked by traders' hesitancy to make major directional bets ahead of the Fed decision.

The service sector report "was a bit better than expected but still pretty weak," said Scott Brown, chief economist with Raymond James & Associates in St Petersburg, Fla. "Market reaction should be pretty limited and still consistent with sluggish growth overall.

"Bonds at this point are watching the stock market and the dollar, both of which are being helped by the drop in commodity prices," Brown added.

U.S. crude oil fell as low as $118 per barrel, before paring losses to trade around $119.

Despite commodities' recent plunge, inflation readings remain above the Fed's comfort zone. Should those pressures remain elevated the Fed may have to act before year-end to curb inflation, futures markets suggest.

This week, supply of securities will probably be a bigger factor than the central bank's decision, analysts said.

"The Treasury market is more about accommodation for the auctions than anything dramatically different the Fed is going to say," said Bender.

The Treasury Department plans to sell $17 billion of 10-year notes on Wednesday and $10 billion of 30-year bonds on Thursday.

The two-year Treasury note's price was down 2/32 for a yield of 2.57 percent versus 2.54 percent late Monday.

The 30-year Treasury bond was unchanged in price for a yield of 4.59 percent, versus 4.60 percent late Monday.

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