U.S. bond yields, dollar gain, stocks fall after Fed rate hike

Wed Dec 14, 2016 5:08pm EST
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By Caroline Valetkevitch

NEW YORK (Reuters) - Yields on shorter-dated Treasuries hit their highest levels in more than five years on Wednesday while the dollar rose to its highest against the yen in 10 months after the U.S. Federal Reserve raised interest rates and signaled a faster pace of hikes in 2017.

Wall Street stocks ended a volatile session with their biggest percentage decline since before the Nov. 8 U.S. presidential election, while gold prices hit a 10-month low.

As expected, the Fed raised the target federal funds rate 25 basis points to between 0.50 percent and 0.75 percent. It was its first rate hike in a year and its second since the financial crisis.

Central bank policymakers also shifted their outlook to one of slightly faster growth, with President-elect Donald Trump planning a simultaneous round of tax cuts and increased spending on infrastructure. The Fed now sees three rate hikes in 2017 instead of the two foreseen in September.

"It was largely as expected, but it's pretty clear the market is taking it as a bit more aggressive or hawkish than it had thought," said Ed Keon, portfolio manager and managing director at QMA, a multi-asset manager wholly owned by Prudential Financial in Newark.

Yields on two-year Treasury notes rose to their highest level since August 2009, while three-year yields hit their highest since May 2010 and five-year yields rose to their highest since May 2011.

U.S. two-year Treasury notes were last down 4/32 in price to yield 1.238 percent, an increase of more than 8 basis points from its late Tuesday levels.

The dollar rallied about 1.3 percent against the yen to 116.71 yen, its highest since Feb. 8, while the dollar index, which measures the greenback against a basket of six major currencies, hit a nearly three-week high of 101.960 and was last up 0.8 percent at 101.86.   Continued...

A trader works on the floor of the New York Stock Exchange (NYSE) as a television screen displays coverage of U.S. Federal Reserve Chairman Janet Yellen shortly after the announcement that the U.S. Federal Reserve will hike interest rates, in New York, U.S., December 14, 2016.  REUTERS/Lucas Jackson - RTX2V29C