Wall Street falls as Fed minutes send bond yields higher

US stocks had closed lower on Wednesday in a rocky session after the release of the minutes from the Federal Reserve’s January meeting pushed yields on the benchmark 10-year US Treasury note to a four-year high.

After the Fed left interest rates unchanged in January, minutes showed the US central bank’s rate-setting committee grew more confident on the need to keep raising rates, with most believing inflation would perk up amid an improving economic landscape.

Stocks initially reacted positively, with each of the major Wall St indexes touching session highs. Stocks began to pare gains, however, as bond yields climbed to a four-year high of 2.957 per cent on the likelihood of further rate increases this year.

“The Fed meeting minutes indicated Fed members weren’ too worried about inflation, so that was music to the markets ears,” said Michael Arone, Chief Investment Strategist at State Street Global Advisors in Boston.

“Since then the market is recognising the meeting happened at the end of January and since then we have had the strong jobs report, the average hourly earnings pickup, the CPI figures and they also said it is going to be appropriate to raise rates.”

Expectations for a quarter-point hike at the Fed’s next meeting in March are currently 93.5 per cent, according to Thomson Reuters data. The Fed has forecast three rate hikes in 2018.

The Dow Jones Industrial Average fell 166.97 points, or 0.67 per cent, to 24,797.78, the S&P 500 lost 14.93 points, or 0.55 per cent, to 2,701.33 and the Nasdaq Composite dropped 16.08 points, or 0.22 per cent, to 7,218.23.

After inflation worries knocked the S&P 500 down more than 10 per cent from its January 26 high, stocks had rebounded in recent sessions as yields on the 10-year US Treasury note had stabilised around the 2.9 per cent mark. Even with the recent rally, the index has been unable to convincingly hold above its 50-day moving average, seen as a key support level.

“It is unusual for it to make that V-shaped recovery that it did and keep going,” said Jeff Zipper, managing director at the US Bank Private Client Reserve in Palm Beach, Florida. “We keep hearing about a possible re-test of that bottom but we will see how it holds up.”

The prospect of higher rates and an unexpected fall in January US existing home sales dented the real estate sector, off 1.81 per cent. Other sectors seen as bond proxies due to their high dividend yields, utilities and telecoms, also dropped more than 1 per cent.

Benchmark 10-year notes last fell 13/32 in price to yield 2.9408 per cent from 2.893 per cent late on Tuesday. Declining issues outnumbered advancing ones on the NYSE by a 1.17-to-1 ratio; on Nasdaq, a 1.24-to-1 ratio favoured advancers. Volume on US exchanges was 6.96 billion shares, compared to the 8.49 billion average over the last 20 trading days.