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Shorter-Dated Issues Firmer on Fed Outlook

Not only did the Fed buy the market another round of drinks, but it didn't even take the punch bowl away. But Treasuries were hardly drunk with happiness. Indeed, the long bond tripped hard, falling more than a point as curve steepening trades were revived. The Fed's 50-basis-point rate cut and asymmetric bias Tuesday hardly surprised, but the lack of a clear signal that rate cuts were on their way out boosted the short end at the expense of the bond.

The 2s-30s spread rocketed from a morning low at +149 basis points to +169 basis points after the Fed's move. The market had been growing more concerned in recent sessions that the Fed's easing game was up such that the Fed funds futures market largely priced out the chance for a sub-4% funds rate. With the open-door statement from the FOMC, the July Fed funds contract surged higher to price in nearly 70% risk for a 3.75% target.

Trading remained very subdued heading into the announcement, with shorter dated instruments underperforming. The option buyer (some 30,000) of 10-year 109 calls pared that position by about 10,000. Neither stocks nor the dollar had much reaction to the Fed.

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