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Treasuries Climb after Rate Cut

FOMC announced another half point cut in the funds and discount rates, continuing to respond to the Sept. 11 attacks. Asset markets applauded, with both bonds and stocks gaining ground -- the bond finished up a half point and the Dow rose 1.3%. The markets slept through the early afternoon, awaiting the FOMC, with the Treasury curve holding a slightly flatter posture toward +250 basis points on beliefs the Fed might signal a less aggressive easing trajectory.

Sources reported a large seller of December five-year futures against bonds on both Monday and again Tuesday, unwinding a curve steepening trade versus bonds. More talk of fiscal prudence by President Bush also supported the bond into the Fed-time. While there was a little knee-jerk "sell-the-fact" on the Fed's rate cut, both bonds and stocks quickly rallied, though shorter-dated Treasuries led the charge into the close. The two-year note and 30-year bond curve steepened back toward +260 basis points on the Fed's mention of "damped" demand amid "significantly heightened uncertainty," suggesting further easing ahead. Fed funds futures started pricing in a 2% rate by yearend.

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