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Cool to Rate Cuts, Bonds Still Climb

Tuesday was all about the FOMC and though the actual announcement offered no surprises, Treasuries got boost from a late meltdown in equities. The markets waited patiently for the 2:14 EDT announcement. Treasuries were little changed, as was the dollar, while stocks were posting marginal gains heading into "Fed-time." The FOMC fully met expectations, chopping another quarter point off the funds rate target (and discount rate), and maintaining its bias toward weak economic conditions ahead. The initial reaction in bonds was a muted "sell the fact" trade. But, Wall Street read the Fed's terse statement much more negatively. With little acknowledgement of bright spots for the economy (other than "household spending has been sustained"), stocks sunk like a stone. The plunge in equities, with the NASDAQ dropping another 2.7%, gave impetus to Treasury gains, especially in shorter-dated instruments. Yield on the 2s fell some 10bps, while the bond shed 3bps to close at 5.43%. The 2s-30s curve steepened back toward the 180bp area as the market is looking for at least one more 25 bp easing by year end.

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