The overnight session was very quiet for bonds with most major markets closed for various holidays. The first meaningful movement followed the ISM Manufacturing report’s major miss (52.8 vs 55.0). This was the lowest since October 2016 and several internal components were at longer-term lows as well. Bonds rallied several bps and then locked in to a sideways approach before the Fed.
The announcement itself was slightly dovish. The Fed removed its reference to energy prices being an explanation for low inflation. It retained its “patient” verbiage, and it didn’t directly mention that foreign economic risks had subsided. Bonds rallied a bit more as a result.
But during Powell’s press conference, the Fed Chair said that there was indeed slightly less risk posed by foreign economies in the time since the last Fed announcement. He also said that there was no reason to believe one way or the other that the Fed’s next move would be a hike or a cut. Market participants had perhaps hoped he would give at least some small indication that a cut was possible later this year or early next year.
Unsurprisingly then, Fed Funds Futures led the reversal in bond yields. Weakness in shorter-dated maturities (think 2yr Treasuries as opposed to 10yr) radiated out the yield curve. 10yr yields actually remained unchanged on the day while 2yr yields ended the day up more than 4bps. In the bigger picture, this keeps the technical outlook unchanged as 10yr yields are still unable to break below 2.50%.