After the FOMC Statement

Treasury prices dropped on Wednesday morning as marker participants engaged in profit taking after Tuesday’s rally caused by Greece’s downgrade and Goldman Sach’s testimonies about potential fraudulent activity. Treasury levels continued to free fall in the afternoon trading in spite of the Fed’s announcement of no change in the current Fed Funds rate. The price drop in the long bond can be attributed to market participants’ concern that the Fed’s continuing lack of action could cause inflation to be difficult to control in the future. For the record the Treasury department auctioned $42 billion of 5-year Treasuries and received bids totaling $116 billion, a bid to cover ratio of 2.75, higher than the 2.67 average seen in the past 4 auctions. Indirect Bidders’ demand was also strong at 48.90% compared to 44.30% on average. Direct bidders, which include domestic money managers, purchased 14.30%. By the end of the day the 2-year note fell 2/32 yielding 1.02% while the 5-year declined 11/32 to yield 2.50%. The benchmark 10-year note lost 20/32 of a point yielding 3.77% while the long bond declined 27/32 to yield 4.63%.

The afternoon brought no surprises as the Federal Reserve announced it will continue to keep rates at the current range of 0.00% – 0.25%. The Fed did acknowledge in its FOMC statement certain improving conditions in the economy but suggested that the slack left from the recession warrants a low interest rate strategy for an extended period.

“Economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level…”

Although, there was speculation that the Vice Chairman James Bullard may dissent after recently saying the extended period language was putting the Fed “in a box”, he voted in agreement in favor of the decision leaving Kansas City Fed President Thomas Hoenig as the only dissenter. The Fed statement explains Hoenig’s concerns saying he believes:

“…the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.” FOMC Decision April 28, 2010

Treasury prices are reacting to this morning’s economic releases showing a slightly worst than expected reading in the weekly claims report. The 2-year Treasury is trading flat yielding 1.02% while the 5-year note has risen 1/32 to yield 2.52%. The benchmark 10-year note is currently trading 1/32 higher to yield 3.76% while the long bond has gained 2/32 to yield 4.62%. The Department of Labor released this morning its weekly Initial Jobless Claims report showing that first time claims were higher than expected at 448,000 versus analyst’s estimate of a 445,000 increase. The Continuing Claims report also showed a higher than expected reading at 4.645 million versus the expected 4.618 million. The continuing claims revision for the previous week rose 17,000 to 4.663 million. The more stable 4-week average number of Initial Claims also rose by 1,500 to 462,250. Finally, the Treasury will auction $32 billion 7-year notes at noon CDT, completing $129 billion of new issuance for the week.