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Treasurys drop as Fed rate forecasts worry traders

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U.S. Treasury debt prices fell on Wednesday after the Federal Reserve kept in place near-zero interest rates and other ultra-loose U.S. monetary policies meant to boost economic growth.

After surrendering early gains spurred by unexpectedly tame U.S. inflation data, Treasury prices turned negative as Fed policymakers issued economic assessments and a policy statement after a two-day meeting in Washington.

The Fed pleased many investors by pledging to keep policies accommodative for a ``considerable time'' but spooked others by raising projections for interest rate levels in 2015 and later, according to Anthony Valeri, investment strategist at LPL Financial in San Diego.

``The market is reacting a little negative, and I think it is focusing on the 2015 median, which was raised from 1-1/8 to 1-3/8,'' Valeri said. ``It implies the Fed will hike more than anticipated in 2015 and maybe hike more in 2016 than the market anticipated.''

Read MoreHere's what changed in new Fed statement

Yields on benchmark 10-year Treasury notes — used to calculate mortgage rates and other consumer loans — were nearly flat at 2.60 percent from a close of 2.59 percent.

Thirty-year bond prices edged up, bringing the yield to 3.36 percent. Two-year Treasury notes were trading flat to lower.

``The market seems to be taking this a little bit more hawkish,'' said Sam Diedrich, portfolio manager at Pacific Alternative Asset Management Co in Irvine, California. Bond prices rose in early New York trading after government economists reported U.S. consumer prices fell for the first time in nearly 1-1/2 years in August.

The Labor Department said its Consumer Price Index dropped 0.2 percent last month as a broad decline in energy prices offset increases in food and shelter costs. It was the first decline since April 2013 and followed a 0.1 percent gain in July.

Stripping out food and energy prices, the so-called core CPI was flat in August for the first time since October 2010 after nudging up 0.1 percent in July.

``The core was unchanged, and that's the first time the core's been unchanged month over month since October 2010,'' said Ian Lyngen, senior government bond strategist at CRT Capital in Stamford, Connecticut. ``That's something people are taking notice of.''

Treasuries have also benefited from investor anxieties about Thursday's independence vote in Scotland that has the potential to rattle markets.

—By Reuters