Treasuries End Higher
The Fed got the "thumbs up" from the bond market Wednesday, the day after the lean FOMC statement. Treasuries kicked up their heels after a soft start, supported by the media focus on the "considerable period" the Fed planned to keep rates low. Housing starts also cooled off 3.8% from record levels, adding support to bonds, which convienently overlooked the sharp rise in permits.
Ahead of the open, the MBA mortgage market index slipped 5.8% after refis tumbled 15.4%. The budget deficit also widened to $76.4 billion in August from $54.7 billion. The combination of a 37-year low 1.3% core CPI year over year, along with the Fed's focus on employment lags and disinflation risks on Tuesday, helped set up corrective curve flattening. This dominated the otherwise low volume upmove, with the front-end seen lagging the back. Indeed, one bank reportedly bought more bond calls against euro$ puts as a hedge for its client's mortgage portfolio.
The December bond closed up 1-1/2 pts at 108.19, sharply outperforming, though off highs of 108.31, while the 2-year note and 30-year bond spread collapsed 6 basis points to +353 basis points -- veering ahead of +366.5 basis points August wides. The sharp turnaround came as somewhat of a surprise after early selling was linking to hedge locks on several large corporate issues that later priced.
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