Treasurys dip on Fed decision
Government bond prices fell slightly after the Fed announced that it will leave the key federal funds rate steady at 2%.
NEW YORK (CNNMoney.com) -- Treasury prices dipped on Tuesday after the Federal Reserve announced its decision to hold the key federal funds rate steady at 2%, a move that most traders were expecting.
In addition to listening to the Fed on Tuesday afternoon, market traders were also looking ahead to auctions for $27 billion worth of government debt scheduled for later in the week.
The benchmark 10-year note fell 11/32 to 98 31/32 and its yield rose to 4%.
The 2-year note fell 1/32 to 100 12/32 and yielded 2.54%. The 30-year long bond fell 28/32 to 96 2/32, with the yield rising to 4.62%. Bond prices and yields move in opposite directions.
Bond prices dipped slightly after the Fed's announcement, but in comparison with bond market movements after surprise Fed announcements, one analyst said the movement was not significant.
"Basically, it is a slight dip," said William Larkin, portfolio manager at Cabot Money Management, "which to me is almost no change."
Fed announcement: The Fed cut interest rates seven times in a row between September of last year and April of this year, in order to fight the economic slowdown, but in the most recent two announcements, the Fed left rates steady. At this meeting, members of the Fed had to weigh the economic slowdown with mounting inflation concerns.
The Fed expressed concern over inflation, but it also said that it needs to support sagging housing markets, labor markets and the financial sector. "Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee," the Fed said in its statement.
The language of the statement made it clear that the Fed is concerned about inflation, even if it did not raise interest rates. "They did what they were supposed to do," said Larkin. "They addressed everybody's concerns."
Bond prices did dip a bit after the announcement. "It is a slight negative that they are not tightening the screws, because when the economy does get traction, there is now a growing possibility it might be more difficult to control the future inflation," said Larkin.
Bond investors like to see the Fed fight inflation, because inflation decreases the value of the principal on long-term investments. "If their assumptions are wrong, bond investors will get hurt the worst because the principle erosion could get worse," said Larkin.
An analyst who was confident that the Fed would leave the rate at 2% said that the Fed will try to boost the economy in the coming months with policy changes that go beyond interest rate movements.
"The Fed's actions are going to continue to come though tweaking the market support programs and not changing the interest rates," said Steve Van Order, fixed-income strategist at Calvert Funds, in a conversation before the Fed's decision was announced.
$27 billion debt auction: On Monday, prices fell as traders waited for a surge in the supply of government debt. The U.S. Treasury Department said last week it will auction $17 billion in new 10-year notes and $10 billion in new 30-year bonds this week.
"We are in a cycle of heavy Treasury supply because of all the things that have to be financed," said Van Order.
Federal debt as a percentage of gross domestic product is climbing, which means investors can expect more government bonds to be sold, he said.
The government expects to need to borrow billions of dollars in the third quarter to pay for the costly wars in Afghanistan and Iraq.
"There is a lot of new supply coming," said Van Order. "If the auctions are sloppy, then there might be a big selloff. If the auctions go well, we could have a little rally." 
