Most Fedwatchers took the Fed's dovish line at face value that rates would remain low for longer than necessary while deflation remained a threat, but the bond market put Fed credibility in the penalty box for raising expectations via open mouth policy and then delivering a stingier cut. The shakeout from the ensuing long-squaring permeated the fixed income markets. General Motors priced a $17 billion multi-tranch issue, which preoccupied traders trying to meet strong demand while crowding out government paper.
The September bond closed 1-24/32 lower at 117-02, while the 2-year note and 30-year bond spread closed one or two basis points tighter at +316 basis points. Losses were most pronounced in the belly of the curve, due to mortgage-related negative convexity selling. Agency spreads tightened after Fannie Mae announced a debt buyback.