It was all about stocks Wednesday, rather that the FOMC. Overnight news of WorldCom (Con?) fraudulant earnings reports hammered equity markets around the globe and gave Treasuries a huge flight to quality bid into the New York open. Shorter dated Treasuries screamed higher, knocking the yield on the two-year note down over 20 basis points toward 2.55%. Sources also reported a good bid in 10-year notes as the dramatic drop in yields revived the convexity trades. Meanwhile, the two-year notes and 30-year bond curve climbed to its wides for the year, through +273 basis points.
Amidst Wall Street turbulance, there was some talk the Fed might shift to an easing bias, or perhaps even cut rates. The markets quieted into the Fed's announcement, but strong economic data (new home sales and durables) helped motivate short covering on stocks and profit taking on bonds. There was also talk of a seller of Treasuries for bunds. While the Fed's announcement held no surprises, Treasuries registed modest disappoint at the fact the FOMC didn't overtly mention the potential for an easing. Indeed, though not hawkish, the Fed's statement wasn't overly dovish either.
Equities finished well off their lows, near unchanged by day's end. Treasuries, meanwhile, held some of their ground, with the two-year note hovering around 2.75%. Strong new home sales and durables data were key factors here.