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Treasuries End Higher

The FOMC did not surprise as it left rates steady and reiterated its concerns over the risk of falling prices. Nevertheless, the Treasury curve steepened rather dramatically, with the 2s-30s out over 12 basis points.

The front end rallied as shorts covered as the Fed indicated rates will not be headed higher over the foreseeable future and as the FOMC was perhaps not as upbeat on growth as some expected -- especially with respect to the labor market, which was termed "mixed." Nevertheless, the long end sunk on indications the Fed is becoming more sanguine on the economy. The 2s-30s spread gapped back toward its all-time wide at +363 basis points while the 2s-10s gapped out to a decades wide at +269 basis points.

Fed funds futures prices also gained following the FOMC announcement. After nearly pricing for a quarter point rate hike by the March 2004 FOMC, the post-FOMC implied rate on the April contract fell to 1.175%, suggesting only about 70% likelihood of a tightening.

The dollar also gained ground, helped by stronger equities. Prior to the Fed's announcement, the markets were predictably quiet and range-bound. There was no reaction to stronger than expected weekly chain store sales, nor to a weak Richmond Fed survey. From MMS International

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