By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices fell on Wednesday, pushing yields up and reversing Tuesday’s rally, after President Barack Obama’s State of the Union address was deemed disappointing to those expecting more details on how to reduce the federal deficit.
“The State of the Union was full of goals such as deficit reduction, but contained few steps on how it will be achieved,” said strategists at RBS Securities. “Thus the market took back a good portion of yesterday’s squeeze to lower yields on the initial news of a spending freeze.”
Yields on 10-year notes (UST10Y 3.40, +0.07, +2.10%) , which move inversely to prices, rose 7 basis points to 3.3%. A basis point is 1/100 percentage point.
Yields on 2-year notes (UST2YR 0.65, +0.07, +11.21%) were little changed at 0.63%.
Bonds extended losses after a report showed sales of new homes in December rose more than expected.
The market’s focus may quickly shift to the monetary policy decision and outlook from the Federal Reserve’s Open Market Committee. See story on market expectations for the Fed.
“We expect the FOMC announcement won’t be particularly bullish or bearish for the market,” said David Ader and Ian Lyngen, bond strategists at CRT Capital Group.
“There may be some enhancement of the economic prospects,” while noting the still-high unemployment rate, they wrote in a note.
Inflation, quantitative easing
There’s a very low risk that the Fed will make any change to its comments on inflation and inflation expectations.
Investors’ expectations, as expressed through the $600 billion market for Treasury Inflation Protected Securities, show inflation will remain relatively contained over the next decade.
The gap between yields on regular 10-year Treasury notes and 10-year TIPS, known as the break-even rate, is about 2.3 percentage points, up from 1.93 in October, according to Barclays Capital. That figure, expressed as a percentage, is what TIPS investors expect consumer inflation to be over the life of the debt.
Investors expect no change to the Fed’s commitment made in November to buy another $600 billion in Treasury debt. The move is an attempt to keep interest rates from rising too much and choking off economic growth.
