Cold feet plagued traders heading into the session and many spent the morning debating the likely Fed action and subsequently taking profits on their aggressive Fed bets. Treasury bills and two- and five-year notes were in the red through most of the session on Fed anxiety as well as supply.
On the block were $16 billion in four-week bills and $16 billion in five-year notes. The long end outperformed in this environment, narrowing the curve to about 235 basis points, especially as the market knocked the risk of a 50 basis point move down to 40% compared to 60% Monday. The divergent auction results reflected the market's uncertainty over the Fed decision, as a sloppy bill auction was offset by a solid five-year sale.
The stage was then set for the FOMC. The short end cheered the Fed's action and the yield on the two-year fell nearly 16 basis points while the bond gave up its earlier gains. Curve steepening was back in full effect as the door was left open for more cuts and the spread between the two-year note and 30-year bond widened by 15 basis points to 250 basis points by the close.