Treasuries Pare Declines After Dovish Fed Policy Statement

  • Bear flattening sparked by ADP, ISM unwound in late trading
  • Two-year note yields retreat from highest level of 2017

Treasuries pared losses and were slightly lower in late trading Wednesday after the Federal Open Market Committee’s statement proved more dovish than some traders anticipated, helping push two-year yields down from the highest levels of 2017.

Yields were higher by less than a basis point across the curve at 3:18 p.m. in New York, after rising as much as 5-7 basis points in morning trading on stronger-than-expected U.S. employment and manufacturing data. Two- to 5-year yields led the retreat after the FOMC statement left intact expectations for two rate increases this year, while acknowledging improvement in consumer and business sentiment over the past six weeks.

  • “There were some remote concerns that the Fed might set the table for a March hike,” said William O’Donnell, U.S. rates desk strategist at Citigroup Inc. in New York. When that didn’t happen, “the front end rallied back toward unchanged on the day”
  • The 5s30s curve, which had flattened as much as 3.9bp to 111bp before the FOMC statement, rebounded to nearly unchanged afterward; outperformance of front end also coincided with comments by National Security Adviser Flynn that U.S. is “officially putting Iran on notice” for “destabilizing behavior”
  • The 2-year yield rose as much as 5.6 basis points to 1.26 percent, its highest since Dec. 28, after the January ADP Employment Change topped the most optimistic estimates and the ISM Manufacturing PMI rose to a two-year high
  • Futures volumes surged on ADP data, with nearly 27k 10Y contracts traded over a minute at 8:15 a.m., and foreign real money active in front end of cash market, trader said
  • A block sale of 5Y futures 2 minutes after the release exacerbated the move; 10,000 FVH7 contracts were sold at 117-20+, below the market by less than a tick
  • Treasury Department announced sizes of next week’s quarterly refunding auctions that were unchanged from previous cycle, as expected; $24b 3Y, $23b 10Y and $15b 30Y will be sold Feb. 7-9
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