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Long End Rallies

Position squaring and curve trades dominated action in the Treasury market Monday. Traders started to get cold feet as Tuesday's FOMC meeting neared and took more of the rate-cut premium out of the market. Dimming expectations of an easing provided further impetus to bullish curve flattening trades.

Shorter-dated Treasuries as well as equities were under water most of the day, both harmed by evolving Fed expectations, while the long bond climbed over a point thanks to the curve trades. There was no new news or events to exacerbate the growing pessimism over the Fed, only the immediacy of Tuesday's meeting and the legacy of Friday's press articles indicating no policy moves would be forthcoming.

Fed funds futures finished Monday reflecting only about 30% chance of Fed action, compared to just over 50% a few days ago. While Tuesday's retail sales data may not matter much to the FOMC's decision, they will be closely monitored.

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