NEW YORK (CNNfn) - U.S. government securities shed earlier gains Wednesday after the Federal Reserve raised its main lending rate by a quarter percentage point and warned that more rate hikes may lie ahead.|
Treasury bills and notes fell after the Fed signaled in a statement that it's not done tightening credit to cool the white-hot economy and pre-empt rising inflation. But the benchmark 30-year Treasury bond held on to earlier gains that came after Treasury Department said it will issue less debt and begin buying its outstanding securities.
Analysts linked the losses in most government securities to fears that the Fed's inflation fighting job is far from over.
"It really comes down to the fact that the Fed is saying demand is excessive," said Josh Stiles, bond strategist at IDEA Global.com "Until they see enough cooling (of the economy) there's potential for more rate hikes."
Just before 3 p.m. ET, the price of the 10-year note, up before the release, fell 1/32 to 95-20/32. Shorter term securities also fell.
The losses to most government securities came after the Fed hiked its main lending rate to 5.75 percent, a widely expected move. But based on the Fed's statement, analysts already are looking ahead to tighter credit.
"The Fed's not finished," John Lonski, senior economist at Moody's Investors Service told CNNfn. "More rate hikes loom." (311K WAFF) (311K AIF)
A Reuters poll of the 30 U.S. primary dealers -- firms that deal directly with the Federal Reserve Bank of New York -- taken before the decision showed that more than two-thirds of them expect another 25 basis points hike at the Fed's next gathering in March.
The move to steeper borrowing costs is the Fed's fourth effort since June to tap the brakes on an economy now in a record 107 month of expansion. Consumer spending and confidence and spending is strong, unemployment is at a 30-year low, and soaring stocks markets have created trillion of dollars in paper wealth.
But the benchmark 30-year bond rose 1-8/32 to 97-10/32, showing no response to the Fed move. Its yield, which moves inversely to its price, fell to 6.32 percent from 6.42 percent Tuesday. The gains came after the Treasury Department said it will issue less debt than expected and begin buying its outstanding securities. The prospect of fewer bonds in circulation drew a flood of buying, sending the yield on the benchmark 30-year bond to its lowest point of the year.
The Treasury, buoyed by the first budget surpluses in a generation, said it will reduce the amount and frequency at which it sells debt, lowering the upcoming quarterly refunding to $32 billion.
"The market was looking for $37 billion," Tony Crescenzi, bond market strategist at Miller Tabak & Co., said. "This continues the Treasury's effort to reduce the level of issuance."
The agency is cutting back sales of new 30-year bonds to one a year from two, and will sell new five- and 10-year notes twice a year, according to Reuters. Further, the government will start buying back debt within two months, focusing on maturities of over 10 years and in initial chunks of about $1 billion, the news agency said.
The day's economic data had no apparent market effect. New-home sales rose 4.6 percent to a seasonally adjusted annual rate of 900,000 units in December, above analysts' estimates of 895,000 units. Separately, the Conference Board said its index of leading indicators gained 0.4 percent to 108.7 in December, just above analysts' expectations of a 0.3 percent rise and up from a 0.3 percent increase in October.
Demand for long-term debt surged after the Government earlier this year announced it will be borrowing less over time, as the economy's longest expansion on record has led to a surge in tax receipts.
This demand led to an inverted yield curve, in which shorter-term securities like bills and notes yield more than bonds, whose maturities are longer. The trend is unusual, because investors typically demand higher yields on longer-term dept to compensate them for the risk that inflation will erode the value of their holdings over time.
Historically, an inverted curve signals an economic slowdown. But analysts call the current inversion a symptom of demand for long term debt.
The dollar showed little response to the Fed's move, holding on to earlier gains against the yen and weakness versus the euro.
Just before 3 p.m. ET, the dollar rose to 108.26 yen from 107.81 yen Tuesday. The euro rose to 97.75 cents from 97.16 cents Tuesday.
The dollar has shown strength in recent days, some analysts link to continued evidence that the U.S. economy continues to outperform its overseas counterparts, raising the prospect for higher interest rates ahead. Higher rates make dollar-denominated securities, which must be bought in local currency, more attractive to overseas investors