Treasuries Rally For Second Day

Momentum from Tuesday's interest rate cut and expectations of another easing in December helped lift the bond market

Treasuries continued to rally in the wake of another agressive rate cut from the Fed and due to expectations of another rate cut at the Fed's December 11 Federal Open Market Committee meeting. The FOMC decision to cut the Fed funds rate to 2.0%, from the previous 2.5%, took the rate to its lowest level since 1961, putting Treasury investors in a bullish mood. Moreover, Fed funds futures indicate that traders fully expect the Fed will ease an additional 25 bps by the end of the year.

This morning's stronger than expected productivity data added to the bullish sentiment in Treasuries. Non-farm productivity rose 2.7% for third quarter, well above Standard and Poors econonic research unit MMS survey median call of 1.8%. The strong productivity data helps to further alleviate any lingering inflation fears.

After a solid auction yesterday, the 5yr note is well bid, slightly outperforming the rest of the curve. Meanwhile, both the 5s and 10s are benefiting from convexity trades as mortgage rates hit their lowest levels in 30 years. Wholesale trade data added mild support as well.

The Treasury will conduct a $7 billion reopened 10yr auction this afternoon, which is expected to see solid interest. Besides the auction, traders will keep an eye on consumer credit data and any momentum in equities.

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