Treasury yields fell on Wednesday, as investors digested the Federal Reserve's move to ease the pace of balance sheet reduction, and the central bank's chairman Jerome Powell ruled out the possibility of a rate hike next month.
The yield on the 10-year Treasury dropped 5 basis points at 4.632%. The 2-year Treasury yield was down nearly 9 basis points at 4.96%.
Yields and prices move in opposite directions. One basis point equals to 0.01%.
The central bank said that beginning in June it will slow the pace at which it allows maturing bond proceeds to roll off its balance sheet without reinvesting them, a process known as quantitative tightening. QT was one way the Fed tightened monetary conditions after inflation surged.
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"They are not cutting interest rates, but they are cutting QT. What? The bond market oughta love this," Chris Rupkey, chief economist at FWDBONDS, said in a note. "Cutting QT means less new cash that the U.S. Treasury has to raise in the markets ... This sounds to us like a backdoor easing of monetary policy."
The Fed had been allowing up to $95 billion a month in proceeds from maturing Treasurys and mortgage-backed securities to roll off each month. Under the new plan, the Fed will reduce the monthly cap on Treasurys to $25 billion from $60 billion.
Treasury yields dropped to their session lows as Powell said the next policy move at its June meeting won't be an interest rate hike.
Money Report
"I think it's unlikely that the next policy rate move will be a hike. I'd say it's unlikely," said Powell during the press conference following the decision
"I think we'd need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation sustainably down to 2% over time," Powell said, when asked about what it would take to have a rate increase. "That's not what we think we're seeing."
The central bank kept its benchmark short-term borrowing rate in a targeted range between 5.25%-5.50%, as widely expected. Powell also noted the lack of progress in getting inflation back down to the central bank's 2% target.
"Inflation is still too high," said Powell. "Further progress in bringing it down is not assured and the path forward is uncertain."
