Bonds Kick Up After Fed's Cut

The rate cut took the market completely by surprise. Shorter-dated treasury prices surged higher

Like a Scud missile, Wednesday's Fed intermeeting rate cut was aimed at off-setting the erosion of corporate profitability, business confidence and capital spending. With stocks already on the mend in April, this move clearly was aimed at restoring confidence and halting the spread of pessimism to the consumer sector. The 50-basis-point cut in the funds and discount rates to 4.5% and 4.0%, respectively, galvanized professional short-covering on equities, and in the end contributed to extreme curve steepening after a couple false starts.

The June bond closed 4/32 higher, grasping the 102-handle after reversing sharply from below 101-00. The 2s/30s cleared +146 basis points to set cycle highs to take fresh aim at +166-basis-point June 1994 wides, after basing in the +114-basis-points area.

Short-covering was most pronounced in the front-end as the Fed cut raised concerns about corporate distress -- the yield on the 2-year note fell a breathtaking 30 basis points back below 4.2%. Hedge fund buying of $2.5 billion in cash 2s and $1 billion in 5s was rumored, and pre-Fed and short-covering on 10s also got the ball rolling.

The trade gap narrowed, LEI eased 0.3% and the dollar slipped.

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