March 19, 2014 / 8:31 PM / 4 years ago

TREASURIES-U.S. bond market sags on Fed's change on rate guidance

* Fed to hold rates near zero long after economy strengthens
    * But Fed's forecast, Yellen remarks hint rate hikes sooner
    * Fed widely expected to pare bond purchases by $10 billion
    * Five-year yield set for biggest one-day spike since July

 (Updates throughout, adds quote)
    By Richard Leong
    NEW YORK, March 19 (Reuters) - U.S. government debt prices
sank on Wednesday on the perception that Federal Reserve
policy-makers will start raising interest rates sooner than
    Speaking at a press conference after the Fed's two day 
policy meeting, Fed Chair Janet Yellen spooked traders saying
around six months after its current asset purchase program ends
might be a "considerable period" when it might raise rates.
    Fears that the Federal Open Market Committee might move away
from its near-zero rate policy sooner than some traders had
previously thought unleashed a wave of selling. Short-dated and
intermediate Treasuries suffered the biggest losses since they
are seen most vulnerable to a swifter change in Fed policy. 
    "The Fed moved the goal post again," said David Molnar,
partner and managing director at HighTower San Diego. "You are
seeing pressure on bonds and rate-sensitive sectors."
    The Fed, as expected, reduced its monthly purchases of
Treasuries and mortgage-backed securities by $10 billion to $55
billion, keeping it on course to end its third round of
quantitative easing late this year.
    In its latest policy statement, the FOMC dropped a set of
guideposts it was using to communicate publicly when it would
increase its target on the federal funds rate. This overnight
cost on interbank borrowing has been near zero since December
    The group also scrapped the promise to hold rates at
rockbottom levels "well past the time" the jobless rate falls
below 6.5 percent. The move did not indicate any change in its
policy intentions.
    The intended tone of the FOMC statement was undermined by
the forecasts of individual policy-makers, which collectively
showed the unemployment rate might fall faster than they had
earlier projected in December.
    Moreover, 13 Fed officials preferred the first rate hike in
2015, compared with 12 in December. 
    Benchmark 10-year Treasuries notes last traded
26/32 lower in price to yield 2.773 percent, up 9 basis points
from late on Tuesday.
    The five-year note tumbled 25/32 in price with
its yield surging 16 basis points, the largest one-day rise
since July 2013, to 1.712 percent. 

 (Reporting by Richard Leong; Editing by Meredith Mazzilli and
Diane Craft)
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