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Treasuries See Further Downside In Reaction To Fed Minutes

After moving modestly higher early in the session, treasuries showed another notable move to the downside over the course of the trading day on Wednesday.

Bond prices pulled back well off their early highs and firmly into negative territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 3.7 basis points to 1.705 percent.

The ten-year yield extended the strong upward move seen over the two previous sessions, reaching its highest closing level in nine months.

Treasuries initially benefited from bargain hunting but turned lower over the course of the morning and saw further downside following the release of the minutes of the latest Federal Reserve meeting.

According to the minutes of the December 14-15 meeting, members of the Fed are preparing to begin reducing the size of the central bank's balance sheet soon after raising interest rates.

The minutes showed participants had initial discussions about the appropriate conditions and timing for reducing the Fed's approximately $8.8 trillion portfolio of Treasury and mortgage securities.

While the previous balance sheet runoff commenced almost two years after policy rate liftoff, participants judge that the appropriate timing this time around would likely be closer to that of policy rate liftoff.

"They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalization," the minutes said.

The minutes noted many participants also judged that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode.

The discussions about reducing the size of the central bank's balance sheet came as the Fed also agreed to accelerate the pace of reductions to its asset purchases, with the program currently slated to come to an end in mid-March.

Many economists expect the Fed to begin raising interest rates as soon as the asset program ends, with CME's FedWatch Tool currently indicating a 71.0 percent chance of a rate hike at the March 15-16 meeting.

The minutes noted that participants generally agreed it may be warranted to raise rates sooner or at a faster pace previously anticipated given the outlook for the economy, the labor market, and inflation.

In U.S. economic news, payroll processor ADP released a report showing much stronger than expected private sector job growth in the month of December.

ADP said private sector employment spiked by 807,000 jobs in December after jumping by a revised 505,000 jobs in November.

Economists had expected private sector employment to increase by 400,000 jobs compared to the addition of 534,000 jobs originally reported for the previous month.

"December's job market strengthened as the fallout from the Delta variant faded and Omicron's impact had yet to be seen," said ADP chief economist Nela Richardson.

On Friday, the Labor Department is scheduled to release its more closely watched monthly employment report, which includes both public and private sector jobs.

Economists currently expect employment to jump by 400,000 jobs in December after rising by 210,000 jobs in November. The unemployment rate is expected to edge down to 4.1 percent from 4.2 percent.

Trading on Thursday may be impacted by reaction to reports on weekly jobless claims, the U.S. trade deficit, factory orders and service sector activity.

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