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10-year yield inches higher after Fed announcement
Benchmark yields hit session highs on Wednesday after the Federal Reserve signaled that it wants to see further economic gains and higher inflation before it decides to raise interest rates.
A statement from the Fed after its latest policy meeting provides no timetable. Many analysts foresee the first hike in September, though Fed Chair Janet Yellen has stressed that any increase will be driven by the latest economic data.
The benchmark 10-year Treasury yield (U.S.: US10Y) rose about 2 basis points to 2.273 percent after touching a session high of 2.30 percent in a knee jerk reaction to the announcement. The yield on a bond moves in the opposite direction to the price.
The yield on two-year paper (U.S.: US2Y) was flat at 0.699 percent, while five-year yields were unchanged at 1.603 percent.
In the statement, the Fed notes that the job market, housing and consumer spending have all improved. The Fed also expects inflation to rise gradually toward its 2 percent target.
The Fed has kept its key short-term rate at a record low near zero since 2008. Once it raises it, other rates-for mortgages, auto loans and corporate borrowing-could rise, too.
Earlier, the Treasury Department auctioned $35 billion in five-year notes at a high yield of 1.625 percent. The bid-to-cover ratio, an indicator of demand, was the highest since November at 2.58, compared to a recent average of 2.50.
Indirect bidders, which include major central banks, were awarded 67.5 percent-the highest on record for that maturity-versus a 10 auction average of 58 percent.
Direct bidders, which includes domestic money managers, brought 5.3 percent, just a tad light of the 8 percent recent average.
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The yield on two-year paper (U.S.: US2Y) was flat at 0.707 percent, while five-year yields rose 3 basis points to 1.623 percent. The benchmark 10-year Treasury yield (U.S.: US10Y) rose about 4 basis points to 2.288 percent. The yield on a bond moves in the opposite direction to the price.
PIMCO Chief Investment Officer Scott Mather said the increase in demand for sort-term debt isn't that surprising.
"We have seen pretty decent demand, certainly on the shorter end of the yield curve, for some period of time. In fact, some areas of the yield curve we think is a bit mispriced, but It's a continuation of what we have seen," Mather said in an interview on CNBC's " Power Lunch " Wednesday.
He thinks the Fed is very likely to begin raising rates in September.
"Bottom line, ahead of the FOMC meeting its clear that buyers are betting on what the Fed has told us many times that even when they hike, they'll drag their feet in doing so thereafter," said Peter Boockvar, chief market analyst at the Lindsey Group, in a note after the results.
"Thus, today's solid auction I don't believe was a vote on whether the Fed will hike in September or not but more so a bet that the Fed will be well behind the curve for years to come."
Investors were on the sidelines for most of the trading session on Wednesday as the U.S. Federal Reserve concludes a two-day policy meeting.
The central bank is not expected to unveil any changes but many analysts still expect the Fed to deliver its first rate hike in 9 years at the September meeting.
Fed watchers polled by CNBC anticipate a rate hike in September, by a very thin margin.
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"It is true that there is no press conference scheduled after the statement and this usually downgrades the elements of surprise," Naeem Aslam, chief market analyst at AvaTrade, said in a note.
"But, traders clearly understand the importance of this statement, because this will be the last official statement by the Fed before the September rate hike, which many have prepared themselves for," he added.
"So, if September is the month of the first hike, then surely you want to pay full courtesy to each and every single word out of this statement?"
The U.S. Treasury this week plans to sell $90 billion worth of bonds and on Tuesday auctioned $26 billion in two-year notes at a high yield of 0.69 percent.
"I still think it's a curve flatting environment and you want to be short the front-end," said Luke Bartholomew, investment manager at Aberdeen Asset Management, told CNBC's "Worldwide Exchange."
The short-end of the yield curve tends to be the most sensitive to talk of higher interest rates.
The spread between two-year note yields and 10-year yields narrowed slightly to 157 basis points, compared to 159 basis points late-Tuesday.
On the data front, U.S. pending home sales fell 1.8 percent in June, a sign that higher prices are beginning to take their toll on home buyers.
The report, issued by the National Association of Realtors, comes after five straight months of gains.
-CNBC's Dhara Ranasinghe, Diana Olick and AP contributed to this report.
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