U.S. Treasury yields rose Wednesday after the Federal Reserve maintained its near-term outlook on interest rate increases and said it would begin reversing in October a massive bond-purchase program begun during the financial crisis.
The U.S. 2-year Treasury yield climbed steadily after the announcement and hit a high of of 1.451 percent, its highest level since Nov. 5, 2008, according to Reuters Tradeweb.
The Fed did not raise its benchmark interest rate, as expected. But policymakers indicated another hike is likely this year, while maintaining its view for three rate hikes in 2018. The Fed did reduce its forecast for the number of rate hikes between now and 2019 by one.
"The biggest news today is the Fed's interest rate forecasts,"Chris Rupkey, managing director, chief financial economist, at MUFG, said in a note. "Net, net, the Fed is keeping with the game plan and neither hurricanes nor low inflation can keep them from raising interest rates a third time this year."
The Fed has $4.5 trillion in assets on its balance sheet as the result of its stimulative bond-purchase program. Reversing current policy of reinvesting the proceeds from maturing bonds, the central bank said Wednesday it will initially allow $10 billion to roll off and increase that by $10 billion every quarter.
"It's just finally sinking in," said Bryce Doty, senior fixed income manager with Sit Investment Associates. "The Fed has a credibility issue, even if you think they were going to follow through on their guidance, part of you didn't believe it."
Now, "more and more people are starting to piece it together," he said. "What will be the impact on yield as money is destroyed and eliminated from the financial system?"