Treasuries reversed early losses on Monday after inheriting a corrective downside tone from late Friday rolling into the FOMC meeting tomorrow, closing marginally in the green. Such inconclusive price action matched the ambiguous position at the Fed, where the split policy bias and low 1% Fed funds rate are expected to be maintained.
Few felt compelled to stick their necks out, opting to square up after having been burned the past couple Fed meetings. The three Fedwatchers of the apocalypse: Berry, Ip, and Beckner all largely concurred on the above policy scenario, though two of them speculated that the Fed could accentuate the positive in the economic risk bias.
Stocks lingered in the red amid low volume trade, dented by Hurricane Isabel approaching the Eastern seaboard and the FOMC converging on D.C. Spread product mostly tightened after Fannie Mae's duration gap shrank. While outright trade was thin, more bond calls were purchased by one mortgage shop to hedge risk of yields sliding.
The December bond closed +3/32 at 107-26, near session highs, well above the 107-02 low. The 2-year note and 30-year bond spread sneaked 4 basis points steeper to +359 basis points, as the front-end outperformed -- banking that Fed reflationary policy would remaining intact, and on anticipation of fiscal shortfalls.