Bonds News

TREASURIES-Yields fall as Fed's Powell says balance sheet reduction on auto pilot

 (Adds balance sheet comments, quote, updates prices)
    * Fed revises rate projections for 2019 to two, from three
    * Fed says "some" further gradual rate hikes needed
    * Two-year, 10-year yield curve flattens

    By Karen Brettell
    NEW YORK, Dec 19 (Reuters) - U.S. benchmark Treasury yields
fell to more than eight-month lows on Wednesday after the
Federal Reserve lowered projections for rate hikes next year and
Fed Chair Jerome Powell said that balance sheet reduction is on
    The U.S. central bank raised interest rates and noted that
"some" further gradual rate hikes would be needed, a subtle
change that suggested it was preparing to stop raising borrowing
    Fresh economic forecasts released on Wednesday showed
policymakers expect two rate hikes next year, a reduction from
three projected hikes the Fed made in September.             
    "This is somewhat in between; it wasn’t a totally dovish
hike," said Subadra Rajappa, head of U.S. rates strategy at
Societe Generale in New York. "The fact that they retained the
language around ‘gradual’ I think confirms the current monetary
policy stance, which the market was hoping would turn a little
more data dependent."
    Stocks fell, however, after Powell said that the Fed does
not see a reason to change its balance sheet reduction policy,
as it is not seen as creating significant problems.             
    This spurred safety buying of U.S. government debt.
    "Powell's comment that the pace of balance sheet reduction
is on a preset course and adjusting the pace of balance sheet
reduction is not an option at this time disappointed the
market," said Scott Minerd, global chief investment officer at
Guggenheim Partners in Los Angeles. 
    Benchmark 10-year yields             fell as low as 2.75
percent, the lowest since April 4. The yields have fallen from a
seven-year high of 3.261 percent on Oct. 9.
    Two-year note yields           , which are the most
sensitive to interest rate increases, declined as low as 2.62
percent, the lowest since Aug. 24.
    The yield curve between two-year and 10-year notes
               flattened to 13 basis points, from 16 basis
points before the Fed statement.
    Powell in late November said that the key interest rate was
"just below" neutral, a level that neither boosts nor brakes the
economy, increasing speculation that the U.S. central bank may
pause hikes sooner than previously expected.             

 (Editing by Diane Craft)