Prices dip as all eyes on Fed tapering decision

Prices dip as all eyes on Fed tapering decision

Prices for U.S. Treasurys dipped on Wednesday, with investors reluctant to take on big bets ahead of the end of a two-day Federal Reserve meeting and announcement of a possible slowdown in the bank’s massive asset purchase program.

Fed policymakers are expected to begin slowing their $ 85 billion per month buying of Treasurys and mortgage-backed securities, and are due to issue a statement at 2:00 p.m.

Yields have shot up more than 100 basis points since the Fed began hinting at an exit strategy in May. But a spate of mixed U.S. economic data has underscored how difficult the Fed’s decision is: Pare bond-buying too early and a recovery in the world’s biggest economy could suffer; take too long and risk an asset bubble or other distortions in the market.

“Where we are right now, it’s all on the Fed,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. Before the Fed decision in the afternoon, he said, “volume is going to be on the lighter side. I wouldn’t be surprised if we saw some choppiness.”

Fed Chairman Ben Bernanke will hold a news conference soon after the statement’s release, and the Fed will release fresh quarterly economic and interest rate projections. While analysts said expectations of Fed tapering are now built into the market, estimates varied on the amount by which the Federal Open Market Committee will reduce its so-called quantitative easing program.

“We expect the FOMC to announce a $ 10 billion reduction in its monthly QE asset purchases at its September meeting,” said Michael Carey, chief North America economist, of Credit Agricole in a note to clients. Expectations for the Fed’s pullback overshadowed other events on Wednesday, such as less dovish than expected meeting minutes from the Bank of England.

Benchmark 10-year Treasury notes slipped 4/32 in price to yield 2.87 percent from 2.849 percent late on Tuesday. The 30-year bond traded near flat with a yield of 3.837 percent, from 3.831 percent late on Tuesday.

Data on the health of the U.S. economy were a mixed bag on Wednesday. Mortgage applications rose from a near five-year low as interest rates dipped from a year high. And a surge in permits for single-family homes pointed to a strengthened recovery in the housing market. But U.S. housing starts nonetheless rose less than expected in August amid a sharp slowdown in the multifamily sector.

(Read more: Multifamily sector drags on August housing starts)

Economists fret that a too-swift rise in interest rates could hurt the U.S. housing sector, with buyers nervous about paying higher borrowing costs. Wednesday’s housing starts report “suggests that the drag from the recent surge in mortgage rates is continuing to play out in the housing market, tempering the pace of construction activity,” said Millan Mulraine, director of U.S. research and strategy at TD Securities in New York.

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