US yields lower after Fed holds rates in check

NEW YORK, June 14 (Reuters) – US Treasury yields were lower on Wednesday in choppy trading after the Federal Reserve left interest rates unchanged, as widely expected, but forecast another 50 basis points in hikes by the end of the year.

The central bank kept rates at the 5.00%-5.25% range but in its new summary of economic projections (SEP) indicated a stronger-than-expected economy and a slower decline in inflation will result in a likely rise in borrowing costs by 50 basis points (bps) by the end of this year.

“They finally lowered their unemployment rate a little bit, they raised their GDP a little bit and they raised their inflation, so they are really catching up with what the data is already telling us,” said Ellen Hazen, chief market strategist at F.L. Putnam Investment Management in Wellesley, Massachusetts.

“The biggest surprise for me, the federal funds rate December projection all the way up to 5.6%, so a whole 50 basis point increase, I think the market was expecting 25 bps.”

Yields pared earlier declines after the announcement but reversed course and moved lower once again as Chair Jerome Powell spoke after the statement and said that July’s meeting would be “live” after the decision to hold rates steady today.

“Powell is doing an excellent job walking the monetary tightrope, staying close to the center, and being balanced. He’s acknowledged that inflation is edging lower and said the skip was ‘prudent,'” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.

The yield on 10-year Treasury notes was down 4.5 basis points at 3.794% after hitting a low of 3.771% on the day. The 10-year yield was on track to snap a three-session streak of gains.

Investors will now gauge comments from Fed Chair Jerome Powell for signals on the central’s bank monetary policy path.

Yields had earlier moved lower after a reading of producer inflation fell more than expected in May, coming on the heels of Tuesday’s data which showed a slowing increase in consumer prices.

The yield on the 30-year Treasury bond was down 6.5 basis points at 3.876%.

Policy announcements from the European Central Bank (ECB) and Bank of Japan are expected on Thursday and Friday, respectively.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 90.7 basis points after inverting by as much as 95.53 basis points on the session.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 0.3 basis point at 4.699% after hitting a fresh three-month high of 4.803%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.189%, after closing at 2.157% on Wednesday.

The 10-year TIPS breakeven rate was last at 2.217%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak, additional reporting by Sinéad Carew; Editing by Jonathan Oatis, Kirsten Donovan and Lisa Shumaker)