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Treasurys slide on hawkish view of Fed policy

3-year yield hits highest close since April 2011

AFP/Getty Images

Federal Reserve Chairwoman Janet Yellen

Treasury prices fell on Wednesday after the Fed said it remained committed to its current low-rate policies, but hinted a rate hike could come sooner than had been expected.

The 10-year Treasury note 10_YEAR, -0.84% yield, which rises as prices fall, was up 2.5 basis points on the day at 2.614%. The benchmark yield marked its ninth rise in 10 sessions.

While the Fed didn’t shift the language it uses to define its low-rate policy intentions, the Fed’s “dot plot,” which shows where each member views the trajectory of the funds rate over the coming years, gave rise to the view that the central bank might be considering an earlier time frame to raise rates.

“It’s the shift in the dot plots that has the markets a little bit under pressure,” said Kim Rupert, managing director of global fixed-income analysis for Action Economics LLC. “It reflects the uncertainties within the Fed, the divergent camps.“

During the news conference, Fed Chairwoman Janet Yellen didn't dispute the change in rate projections, which added to the notion that the central bank is growing more comfortable with tighter policy.

“The dots continue to move up, and she in effect made no bones about that, so I think you could take that as cautious optimism from the Fed,” said Robert Tipp, chief investment strategist at Prudential Fixed Income.

The 3-year Treasury note 3_YEAR, +0.27% was among the securities whose yields rose the most. The yield jumped 5 basis points to 1.093%, its highest close since April 2011. Short- and intermediate-term Treasurys react more strongly to Federal Reserve policy shifts, and the rise in yields suggests a slightly more hawkish interpretation of the Fed meeting.

The 30-year bond 30_YEAR, -0.98% yield rose 1.5 basis points to 3.367% while the 5-year note 5_YEAR, -0.16% yield rose 5 basis points to 1.824%. The differential between them narrowed in what’s known as a flattening yield curve.

Treasurys extended gains earlier in the session, following a round of economic data. An index showed falling consumer prices for the first time in nearly a year and a half. The index fell by a seasonally adjusted 0.2% in August.

Data also showed the current-account deficit shrank by 3.7% in the second quarter. A reading on home-builder confidence also hit the highest level in nearly nine years.

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