Bond yields up, dollar rallies after upbeat Fed statement

Wed Oct 29, 2014 4:38pm EDT
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By Yasmeen Abutaleb

NEW YORK (Reuters) - U.S. stocks fell while the dollar and government bond yields rose on Wednesday after the Federal Reserve announced the end of its stimulus program in a statement that also noted improvement in the U.S. labor market.

The Fed, as expected, said it will no longer add to its holdings of Treasury bonds and mortgage-backed securities, effectively ending a program that at its peak pumped $85 billion a month into the financial system to hold interest rates down and boost the flagging economy.

The Fed expressed confidence in the U.S. recovery and said it would remain on track despite a slowdown in many parts of the global economy, especially Europe. Specifically, the Fed said, "underutilization of labor resources is gradually diminishing."

That sparked a selloff in bond markets, with a sharp move in the benchmark two-year U.S. Treasury note, which saw its yield rise to 0.489 percent, the biggest one-day rise for two-year yields in more than three years. The 10-year Treasury note fell 12/32 in price to yield 2.3246 percent.

"I was pleasantly surprised that they removed the reference to there being significant underutilization of labor resources. I think that is a hat tip to some of the progress being made in the labor market," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

Major U.S. stock indexes added to declines on the announcement but then pared losses.

"The reaction was to sell (stocks) because it is a bit more optimistic than perhaps many traders were expecting it to be," said Jacobsen. "What 'considerable time' (before the next hike) means may have been compressed a little bit."

The U.S. dollar jumped 0.7 percent against a basket of major currencies .DXY after being down earlier, and rose 0.8 percent against the euro to $1.2639.   Continued...

An electronic information board is seen at the London Stock Exchange in the City of London October 11, 2013.  REUTERS/Stefan Wermuth