December 20, 2018 / 7:18 PM / 8 months ago

TREASURIES-U.S. yields fall to eight-month lows after Fed

 (Updates prices)
    * Fed plans to continue tightening policy
    * Year-end demand, safety bid helps bonds
    * Two-year, 10-year yield curve flattens

    By Karen Brettell
    NEW YORK, Dec 20 (Reuters) - U.S. Treasury yields fell to
more than eight-month lows on Thursday, and the yield curve
flattened, as investors evaluated the Federal Reserve's moves to
tighten monetary policy.
    The U.S. central bank on Wednesday took a more dovish tone
than in its previous meetings, but stuck by a plan to keep
withdrawing support from an economy it views as strong.
    The Fed signaled "some further gradual" interest rate
increases and no break from cutting its massive bond portfolio.
Stock markets and benchmark Treasury yields slid after the Fed
statement and a press conference by Fed Chairman Jerome Powell
that followed.
    "I think some were hoping to see a little bit more extreme
statement changes, really downgrading the economic outlook or
even having a more explicit tie to data dependency, or something
like that," said Blake Gwinn, a U.S. rates strategist at NatWest
Markets in Stamford, Connecticut. "So maybe there was a little
bit of disappointment there."
    That said, "the reaction has been a bit extreme relative to
what we got," Gwinn added. "Powell in his press conference
sounded much more cautious and two-way than he has at any point
in 2018."
    Benchmark 10-year yields             fell as low as 2.748
percent on Thursday, the lowest since April 4. The yields have
fallen from a seven-year high of 3.261 percent on Oct. 9.
    The yield curve between two- and 10-year notes
               flattened to 9 basis points, matching the
difference in yields reached on Dec. 4, which was the narrowest
since 2007.
    Powell in late November said 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 might
pause hikes sooner than previously expected.             
    Fresh economic forecasts released on Wednesday showed
policymakers expect two rate hikes next year, a reduction from
three hikes projected by the Fed in September.
    Much of the rate reaction to the Fed statement may have been
driven by safety buying as stocks fell, and by investors buying
bonds for year-end portfolio rebalancing.
    "There may have been some investors who either had to add
duration into year-end, or were holding off on portfolio moves
until the Fed cleared out of the way, that may have come into
the market after the Fed cleared," Gwinn said.
    With the Fed out of the way, trading volumes are expected to
decline into the Christmas and New Year holidays, when many
traders will be on vacation.

 (Editing by Steve Orlofsky and Richard Chang)
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