Municipals end weaker after FOMC leaves rate steady

U.S. Treasury prices were little changed Thursday, leaving the 2-year Treasury yield near an nearly nine-year high after the Federal Reserve on Wednesday indicated that it still plans to deliver another rate increase in 2017.

Policy makers left the benchmark interest rate unchanged in a range of 1% to 1.25%.

John Silvia, chief economist at Wells Fargo, said some investors appeared surprised that the Fed still expects to raise rates by December. They said they expect three more rate changes next year, two in 2019 and one in 2020.

Linked to the latter in particular, according to the CME's Fed Watch tool as of 2107 BST Fed funds futures were pointing to 71.9% odds of a 25 basis point rate hike in the central bank's main policy rate on 13 December.

The Federal Reserve's Federal Open Market Committee (FOMC) wraps up their sixth meeting of the year today with a written statement at 2:00pm followed by a Janet Yellen press conference at 2:30pm.

In July, the core personal consumption expenditure (PCE) index, Fed's favor inflation indicator, rose only 1.4 percent year on year, below Fed's two percent target and also lower than the 1.9 percent in January. At its recent meeting, the Fed median forecast for PCE (Personal Consumption Expenditure) or core inflation was revised down to 1.5% for 2017 from 1.7% in its June projection.

Sure, bond traders rushed to price in a rate hike by year-end, with the implied probability climbing to about 60 percent, from below 25 percent on September 8.

The market is "very complacent and very comfortable in its own skin right now and not really concerned about risk much at all", said Cecchini: "I'm anxious about that".

Existing home sales in August from the previous month to an annualised pace of, the National Association of Realtors, said on Wednesday. Inflation has been the key economic factor keeping the Fed from pulling the trigger, so it will be particularly important for investors to get the Fed's latest thinking on that issue.

The central bank, which began its bond-buying program to drive down borrowing costs in the wake of the financial crisis, is now convinced that the economy is strong enough to operate without that level of government support.

Policymakers have signalled their plans for the Fed balance sheet for months in an effort to avoid rattling markets. That means the Fed will end its practice of fully reinvesting the principal payments of maturing bonds into new bonds and instead allow $10 billion in holdings to roll off without reinvestment every month. But its stimulus efforts that have kept rates near historic lows since 2008 have failed to boost inflation. It is now projecting long-term below 2%.

However, with the CBOE Volatility Index.VIX closing at its lowest level in almost two months at 9.67, Peter Cecchini, chief market strategist at Cantor Fitzgerald in NY, said the market is not reflecting risks such as U.S. The projection for unemployment will show that the central bank has achieved its 4.6 percent target for full employment: The jobless rate is at 4.4 percent, near a 16-year low. This is expected to reduce the Fed's balance sheet by around $10bn a month to begin with - but the sums involved are expected to increase to around $50bn a month in a year's time. They continued to forecast one more interest-rate hike later this year, saying storm damage will have only a temporary impact on the economy.

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