Treasuries end mixed after rate rise

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US Treasuries were mixed by the close of trading on Tuesday after the Federal Reserve voted to raise interest rates.

The move, which most analysts expected, raised the federal funds rate for the 11th consecutive time to 3.75 per cent.

Bond prices fell shortly after the Fed decision, pushing yields higher. But the benchmark 10-year US Treasury later recovered, with yields down 0.3 basis points at 4.250 per cent after the close. The yield on 2-year notes rose 7.2bp to 3.995 per cent.

The Fed said although the storm and its aftermath could hit spending, production and employment in the short-term, they were not likely to pose a long-term threat to the economy.

The central bank warned there was an increased risk of energy price volatility in the wake of the storm, but said: “Core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.”

Some investors had been betting that the Fed would decide put its programme of monetary tightening on hold as it attempted to sort through the consequences of Hurricane Katrina.

Eurozone government bonds continued to find support from the political uncertainly following the inconclusive election in Germany. In late afternoon trading in London, the yield on the 10-year Bund edged down 0.4bp to 3.087 per cent.

The ZEW German confidence also came in weaker than expected and indicated that, even before Sunday’s poll, investors were jittery about what impact the results would have on the country’s economic policy.

“Germany has had a double whammy of bad news this week,” said David Brown, chief European economist at Bear Stearns.

Gilts pushed higher as investors looked to the release on Wednesday of the minutes of the September meeting of the Bank of England’s interest-rate setting committee. The central bank left rates on hold earlier this month, after cutting them to 4.5 per cent in August. The 10-year gilt was yielding 4.227 per cent, down 0.1bp.

The bookbuilding process for the world’s first 50-year inflation linked bond also began with price guidance at about 14bp to 19bp below the linker that matures in 2035. The gilt is expected to be priced on Thursday.

Japanese government bond prices were lower after the Nikkei 225 Average rallied to close above the 13,000 level for the first time since 2001. The yield on the benchmark 10-year JGB rose 1bp to 1.365 per cent.

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