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Treasuries Recover From Lows After Fed Announcement, Close Nearly Flat

Treasuries drifted lower over the course of the trading session on Wednesday but rebounded following the Federal Reserve's monetary policy announcement.

Bond prices climbed well off their lows of the session, ending the day nearly unchanged. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, edged down by less than a basis point to 1.620 percent after reaching a high of 1.659 percent.

The rebound by treasuries came after the Fed upgraded its assessment of the U.S. economy but maintained its ultra-easy monetary policy as widely expected.

Citing progress on vaccinations and strong policy support, the Fed noted indicators of economic activity and employment have "strengthened," which reflects a modest upgrade from last month, when the central bank said the indicators have "turned up recently."

The Fed also said the sectors most adversely affected by the coronavirus pandemic remain weak but have shown improvement.

After previously saying inflation continues to run below 2 percent, the Fed now acknowledges that inflation has risen but largely attributed the increase to "transitory factors."

The statement from the central bank also said risks to the economic outlook remain due to the ongoing public health crisis, although that reflects an improvement from last month, when the Fed cited "considerable risks to the economic outlook."

Despite the improvements mentioned in the statement, the Fed once again kept the target range for the federal funds rate at 0 to 1/4 percent.

The Fed also reiterated that it expects rates to remain at near-zero levels until labor market conditions have reached levels consistent with its assessments of maximum employment and inflation is on track to moderately exceed 2 percent for some time.

The central bank also said it plans to continue its bond purchases at a rate of at least $120 billion per month until "substantial further progress" has been made toward its goals of maximum employment and price stability.

Fed Chair Jerome Powell's subsequent comments indicating it will likely "take some time for substantial further progress to be achieved" seemed to assure traders the central bank is not likely to begin tapering its asset purchases anytime soon.

Paul Ashworth, Chief US Economist at Capital Economics, said there was nothing in the announcement to change his view that the Fed won't begin to taper its asset purchases until the start of next year and won't begin to raise interest rates until late 2023.

Trading on Thursday may continue to be impacted by reaction to the Fed announcement, although traders are also likely to keep an eye on the preliminary reading on first quarter GDP as well as reports on weekly jobless claims and pending home sales.

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