Bonds Sink After Fed Decision

Comstock | Getty Images

Treasuries prices fell on Wednesday and 30-year bonds slumped after the Fed said it would shift more purchases to the five-year sector in a new easing program, with expectations the move would boost the economy and thus help riskier assets such as stocks.

The Federal Reserve committed to monthly purchases of $45 billion in Treasuries on top of the $40 billion per month in mortgage-backed bonds it started buying in September. It will expand purchases to five-year notes from the current seven-, 10- and 30-year Treasuries.

It also took the unprecedented step of saying it would keep interest rates near zero until the jobless rate falls to 6.5 percent, well below its current level, so long as inflation and inflation expectations were contained.

"They are basically taking out the same amount of duration that they were in Twist, but they are buying less in the long end than they had been before," said Ira Jersey,an interest rate strategist at Credit Suisse in New York.

Five-year notes fell 02/32 in price to yield 0.649 percent, from around 0.636 percent late on Tuesday. Benchmark 10-year notes dropped 13/32 to yield 1.699 percent. Thirty-year bonds dropped by more than a full point in price to yield 2.897 percent, up from 2.84 percent late on Tuesday.

US 10-YR
US 30-YR

The yield gap between 5-year notes and 30-year bonds also expanded to 225 basis points from 221 late on Tuesday to the widest since October.

Under Twist, the Fed has been selling shorter-dated Treasuries and using the proceeds to buy longer-dated debt. The program is set to expire at the end of December, and analysts say the Fed has little to no shorter-dated debt to sell.

The shift to economic thresholds surprised some investors and increased the possibility that rates could increase from near zero before the previous guidance of mid-2015.

"The bigger surprise for the bond market was the forward guidance, which changed from a calendar-based one to one based on economic thresholds,'' said Mike Lorizio, head of Treasuries trading at Manulife Asset Management in Boston.

"Many in the market had thought this was a [first quarter] event, but with the fiscal cliff, they might have decided it was better to do it now,'' he said.

The yield curve also expanded as investors bet that new purchases would boost economic growth, which would reduce demand for safe-haven bonds and increase investment in riskier assets including stocks.

Treasuries had edged slightly higher earlier on Wednesday following strong demand for an auction of$21 billion of 10-year notes. The notes sold at a high yield of 1.65 percent,around 2 basis points lower than where the notes were trading before the sale.

The Treasury on Thursday will sell $13 billion of 30-year bonds and next week it will auction two-,five-and seven-year notes along with five-year Treasury inflation-protected securities. The Treasury on Tuesday sold $32 billion of three-year notes.