The FOMC's policy statement did not spook the markets Tuesday and Treasuries breathed a sigh of relief into the close. With no change in either the risk assessment or the time-frame of accommodation, Treasuries rebounded from early lows suffered as some took out insurance against a more hawkish outlook.
Shorter-dated issues predictably led the late-day rally, with the yield on the When Issued 2-year note dropping 10 basis points to 1.72%, and the coupon curve steepened back out about 7 basis points to +342.7 basis points. The one meaningful change in Tuesday's statement (vs. August and September) was the characterization of the labor market, which the FOMC said "appears to be stabilizing." But, bonds took that in stride as the Fed reiterated that risks of lower inflation are still the predominant concern, and that policy accommodation can be maintained for a "considerable period."
Cautious selling typified bonds prior to the Fed's announcement on talk of a more upbeat outlook and elimination of the "considerable period" phrase. Bearish curve flatteners were also in play on the open, with the advent of the 2-year sale further pressuring the front end. The curve dynamics gave the bond an early a bid, but that was surrendered as the FOMC announcement neared.