Treasuries Show Substantial Turnaround After Seeing Initial Weakness

After an initial move to the downside, treasuries showed a substantial turnaround over the course of the trading session on Wednesday.

Bond prices climbed well off their early lows and firmly into positive territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled 10.6 basis points to 3.50 percent.

The sharply higher close by treasuries came after the Federal Reserve announced its decision to continue raising interest rates but signaled its tightening cycle is nearing an end.

The Fed said it has decided to raise the target range for the federal funds rate by another 25 basis points to 4.75 to 5.0 percent.

The latest increase matches the rate hike seen in early February, which came after the central bank raised rates by 75 basis points in November and by 50 basis points in December.

While the Fed also said additional policy firming may be appropriate, that marks a shift from saying ongoing increases in rates will be appropriate.

The central bank’s latest projections suggest the Fed plans to raise rates just one more time this year to a range of 5.0 to 5.25 percent.

In its statement, the Fed described the U.S. banking system as “sound and resilient” despite the recent failures of Silicon Valley Bank and Signature Bank.

The Fed acknowledged recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation but noted the extent of these effects is uncertain.

“The 25bp rate hike and new projections unveiled by the Fed today were towards the more dovish end of potential outcomes,” said Andrew Hunter, Deputy Chief U.S. Economist at Capital Economics.

He added, “Nevertheless, with the crisis making us more confident in our view that the economy will fall into recession soon, we suspect the Fed will be cutting rates again before too long.”

Trading on Thursday may continue to be impacted by reaction to the Fed decision, while reports on weekly jobless claims and new home sales may also attract attention.

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