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NEW YORK (CNNMoney.com) -
Bonds climbed Tuesday after the Federal Open Market Committee raised a key interest rate by a quarter point Tuesday afternoon to 4.25 percent, while the Fed's carefully worded language signaled to investors that the steady rate hikes of 2005 may slow down.
The dollar rose against the euro and the yen.
The benchmark 10-year note rose 7/32 to 99-26/32 to yield 4.52 percent, down from 4.56 late Monday. The 30-year bond gained 12/32 to 109-17/32 to yield 4.72 percent, down from 4.75 late Monday. Bond prices and yields move in opposite directions.
In shorter-dated debt, the two-year note rose one tick to yield 4.41 percent, while the five-year added 4/32 of a point to yield 4.42 percent.
Just before the FOMC announcement, yields stayed stuck in neutral as markets waited to see if the all-important word "measured" would be included in the statement that accompanied the rate verdict.
While the decision to raise rates by a quarter percentage point for the 13th time since June 2004 came as little surprise, the committee at last changed the way it worded its statement. (Click here for the full Fed statement.)
For the first time in more than a year, the Fed dropped the word "accommodative," which implies the economy is strong enough to no longer need stimulation by low interest rates. Many analysts believe this means the Federal Reserve believes the country is nearing a neutral level regarding to inflation and economic growth.
"[The Fed] is signaling the beginning of the end of rate hikes, and that heartens the folks who trade bonds for a living," Bob Walters, chief economist at Quicken Loans told Reuters.
But the central bank kept the word "measured" in its statement, which has long signaled more hikes were ahead.
Earlier in the session, a stronger-than-expected retail sales report sparked a mini-Treasury rally by easing inflation concerns. Inflation hurts bonds as it erodes the value of fixed-income investments.
Retail sales posted a 0.3 percent gain in the month, similar to a revised October reading but less than the 0.4 percent gain forecast by economists surveyed by Briefing.com.
Easing rates would mean the Fed is less concerned about inflation. It would also mean an end to higher rates for new Treasury issues.
But rising interest rates generally help the dollar, as they make dollar-denominated securities more attractive to foreign investors.
In currency trading, the dollar slipped against the euro and retreated from session highs against the yen.
The euro bought $1.1932, down from 1.1952 late Monday, while the dollar bought ¥120.07, up from ¥119.72 the previous session.
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For bond charts, click here.
For complete coverage on the Fed, click here.
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