Wednesday, 18 September 2013

Big moves in the Fixed income markets

So the headlines were as follows from the FOMC

*FED SAYS ASSET PURCHASES ARE NOT ON A PRESET COURSE AND FED DECISION ABOUT THEIR PACE REMAINS CONTINGENT ON ITS ECONOMIC OUTLOOK, LIKELY EFFICACY AND COSTS

*FED SAYS TO KEEP BUYING $85 BILLION IN BONDS PER MONTH, SPLIT AS $40 BLN MBS AND $45 BLN TREASURIES

* FED SAYS TO KEEP FED FUNDS 0-0.25 PCT AS LONG AS JOBLESS RATE ABOVE 6.5 PCT

*FED SAYS RECOGNIZES INFLATION PERSISTENTLY BELOW 2 PCT COULD POSE RISKS TO ECONOMIC PERFORMANCE, BUT ANTICIPATES INFLATION WILL MOVE TOWARD OBJECTIVE OVER MEDIUM TERM  // hints of Japan?

Either way - what we got here was far wide of consensus which was for a $10bn cut in tapering split equally through MBS' and UST's. But this is clearly not going to be considered until December now.

First off, clearly UST's were going to benefit hugely and we saw the 5's yield drop the most (in terms of bps) since March 2009



And, in my opinion, more importantly the US 2s10s tightened from ~250bps down to 235bps on the news as the long end was heavily bought, but at the same time the US 5s30s steepened considereably from 218bps to over 232bps



Furthermore in terms of inflation protected bonds - these were very sought after with the 10's ending up over 2%, pushing the yield down from 0.72% to 0.49%



Overall, it's been a big day and in all honesty, with 2 months to go before the next taper consideration, we could very easily see the 10Y benchmark trade lower towards 2.5%



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