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.