Bonds: Yields drop sharply after Fed meeting

Two-year US Treasury note yields dropped by 11 basis points on Wednesday to 0.86% – registering their largest decline in six months - after the Fed left its main policy settings unchanged and US rate-setters lowered their projections for the expected path of interest rates in 2016.

In her post-meeting conference, and in an answer to a reporter’s questions, Fed chair Janet Yellen flatly dismissed any notion that the central bank might be engineering an inflation ‘overshoot’.

Data published earlier on Wednesday revealed that core consumer prices rose more quickly than expected last month, by 2.3% year-on-year (consensus: 2.2%).

The members of the Federal Reserve board and presidents of its regional banks now saw only two rate hikes this year, versus up to four before, narrowing the difference versus then current market pricing attaching an 80% probability to only one rate rise this year.

Their average projection for the Fed funds rate in 2017 and 2018 were also lowered by 50 basis points.

On the other side of the interest rate curve, the yield on the benchmark 10-year US Treasury note retreated by six basis points to 1.91%.

In parallel, the spread between yields on two-year and thirty-year benchmark Treasuries jumped nine basis points to 185, after hitting its lowest level since 2008 on the day before.

Ten-year Gilts were down by two basis points to 1.523% after the Chancellor set a lower target for Gilt issuance for the new fiscal year in his Budget.