Treasurys fall from highs after Fed statement

AP News
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Posted: Dec 16, 2009 5:30 PM

Treasurys fell from their highs Wednesday after the Federal Reserve left its key interest rate unchanged and offered a slightly more upbeat assessment of the economy.

In a statement at the conclusion of its two-day policy meeting, the Fed said the economic recovery is picking up pace and that the deterioration in the labor market is slowing. But with inflation still subdued, the central bank sees little reason to raise interest rates, and reiterated that rates will stay low for some time to support economic growth.

The Fed's positive stance on the economy was a reminder, however, that rates are eventually going to have to rise, said Howard Simons, a strategist with Bianco Research in Chicago.

Simons said investors will have to start preparing for the Fed to raise rates in the coming months. He predicts the Fed will start hinting about raising rates as early as its next meeting in January.

When the Fed raises rates, yields on bonds are likely to follow, putting pressure on prices.

The 10-year note gave up early gains and fell 2/32 to 98 4/32. Its yield held steady at 3.60 percent, a four-month high. The 10-year note is often used as a benchmark for interest rates on consumer loans.

Treasurys had been slightly higher ahead of the statement after the Labor Department said inflation at the consumer level remained tame in November. The Consumer Price Index rose 0.4 percent last month, compared with a 0.3 percent jump in October. Core inflation, which excludes volatile energy and food prices, was flat after rising for 10 straight months.

The consumer price report eased some of the concerns about inflation that had been raised the day before when data showed prices at the wholesale level jumped more than expected.

Inflation spooks bond investors because it diminishes the fixed returns on debt securities over time.

Though the Fed reiterated that inflation remains in check, investors are worried that the more upbeat tone on the economy means an interest rate hike will happen sooner than previously thought.

In other trading, the price of the 30-year bond slipped 1/32 to 97 15/32. Its yield was unchanged from late Tuesday at 4.53 percent.

The two-year note rose 1/32 to 99 26/32, while its yield fell to 0.84 percent from 0.87 percent.

The yield on the three-month T-bill was unchanged at 0.03 percent. Its discount rate was 0.04 percent.

The cost of borrowing between banks rose slightly. The British Bankers' Association said the rate on three-month loans in dollars _ the London Interbank Offered Rate, or Libor _ increased to 0.2538 from 0.2534 percent.