After opening in the usual holding pattern with 10Y yields just inside the 100-day moving avg of 2.24%, Treasuries ended in a full bear flattener after a “hawkish” FOMC announcement. Prior to the announcement, Treasuries were confined to a tight range with small real money short cover spotted in December 10Y on the open followed by small trading type accounts doing 5/30Y steepeners while real money sold MBS to buy 5Y Treasuries.
Eurodollar futures and related options saw better buying, namely in Dec17 contracts at 98.535, while December Eurodollar and short sterling February call flys were bought. The UN continued in New York with lots of tough talk on North Korea most notably from Japan’s Shinzo Abe who said there is no future for North Korea if it continues on this path. Meanwhile, President Donald Trump said he has decided on Iran but did not elaborate. Stocks were under pressure by midday on what was believed to be a sell tech, buy financials program.
Later, a quick take from the FOMC included the following: balance sheet reduction will start in October, while 2017 and 2018 dots were unchanged so a hike in December is expected, and three more in 2018. The 2019 median Fed funds dot fell to 2.7 vs 2.9 and the 2020 Fed funds dot is 2.9 (a new dot).
The Fed also upgraded growth rates despite the hurricanes and inflation was about steady. As a result the DXY surged in a hawkish interpretation of the announcement as just four FOMC officials don’t want an additional rate hike this year, the dots said. Given the weakness in the inflation data since the June meeting, it was expected that more moved to the no-more-hikes-this-year camp.
S&P 500 extended its drop as non-banking stocks weakened, especially in the technology, health-care and consumer-related sectors. Also hurt were REITs and utilities, which experienced a knee-jerk reaction to rising Treasury yields. After Fed dealers reported heavy sales in December 10Y notes but also profit taking in the 125-20/22 zone. In cash, real money sold in the front end through the belly in cash — the size was modest while outright payers were seen in the long end and various curve trades in swaps including fast money doing 5/10Y steepeners, with real money doing 2/30Y steepeners.