Treasuries Close Firmly In The Red Following Fed Minutes

(RTTNews) - Treasuries moved back to the downside during trading on Wednesday, with some selling pressure generated in reaction to the minutes of the Federal Reserve's latest monetary policy meeting.

Bond prices saw some volatility following the release of the Fed minutes but closed firmly in the red. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 5 basis points to 2.68 percent.

With the increase, the ten-year yield partly offset the losses posted in the two previous sessions but remains well off last Friday's nearly two-year highs.

The lower close by treasuries came as the minutes of the latest Fed meeting appeared to confirm that the central bank is moving closer to tapering its asset purchase program.

While many members said further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases, several others said a reduction in asset purchases would likely soon be warranted.

However, the members agreed that monetary policy in the coming quarters would depend on the evolution of the economic outlook and progress toward the Fed's longer-run objectives of maximum employment and inflation of 2 percent.

Paul Dales, Senior U.S. Economist at Capital Economics, said the minutes support the view that the Fed will probably start to taper its asset purchases in September.

While Dales said there is a chance that the Fed will start to taper in July because of the strength of June's jobs reports, he noted that some members want to see more evidence of the pick-up in economic growth they expect.

"Given that the initial estimate of second-quarter annualized GDP growth, which we think will be as weak as 1.0%, will be released just hours before the Fed's decision on the 31st July, the Fed is likely to hold off until September," Dales said.

Nonetheless, reflecting the uncertainty about the outlook for the Fed's stimulus program, Paul Edelstein, U.S. economist for IHS Global Insight, said the minutes are consistent with the view that the Fed is more likely to defer tapering until 2014.

In light of the focus on the Fed minutes, traders largely shrugged off the results of the Treasury Department's auction of $21 billion worth of ten-year notes.

The ten-year note auction drew a high yield of 2.67 percent and a bid-to-cover ratio of 2.57, while the ten previous ten-year note auctions had an average bid-to-cover ratio of 2.84.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Peter Boockvar of Morgan Stanley said, "After a decent but uneventful three-year note auction at a yield more than double just a few months ago, the ten-year note auction was mediocre."

Finishing off this week's series of long-term securities auctions, the Treasury is due to sell $13 billion worth of thirty-year bonds on Thursday.

Trading on Thursday could also be impacted by the release of a pair of Labor Department reports on weekly jobless claims and import and export prices.

Fed Chairman Ben Bernanke is due to deliver a speech on the history of Fed policy later today, but it is unclear whether he will address the current debate over the central bank's stimulus program.