Treasuries Finish Solidly Higher

Treasuries rose as the Fed's policy-making arm warned of economic weakness, adding to speculation that the Fed might soon ease interest rates

The Federal Open Market Committee's addition of a new twist to its policy statement breathed new life into a lagging Treasury market Tuesday. The FOMC, the policy-making arm of the Federal Reserve bank, kept its federal funds rate unchanged at 1.25%, but indicated risks were tilted toward weakness. However, it wasn't risks to sustainable growth that the Fed noted. Rather, the Fed said risk of a "substantial fall in inflation" outweighed (albeit minor) the risk of a pick-up in inflation.

The specifics of the news didn't really matter to the bond market, however. Traders read headlines of "weakness" and ran with it. Shorter-dated instruments paced the gains on speculation the shift was the precursor to an easing. That reversed earlier losses following a tepid reintroduction of the 3-year note. Fed funds futures gained to reflect nearly 80% chance of a rate cut by Summer, after only about 60% chance earlier.

Treasuries were flat to lower heading into the Fed's afternoon announcement, held back by uncertainty over the FOMC and refunding supply. A disappointing 3-year sale weighed on Treasuries into the Fed's statement. The note was auctioned at an as-expected 2.009%. But the relatively low 1.96 cover (vs 2.44 average) generated concerns about the rest of the support for the upcoming 5-year and and 10-year notes. But those anxieties were relieved by the FOMC's announcement.

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