Rates Drop ~20bps After Fed Holds Rates Again

Fed holds rates unchanged but strikes dovish tone. As expected, the Fed held rates unchanged today. In his ensuing press conference, Fed Chair Jerome Powell highlighted the effect that higher long-term bond yields have had on financial conditions, decreasing the need for further hikes at this time. The FOMC’s statement was largely unchanged from the prior meeting, but a notable tweak was to upgrade their description of the pace of economic growth from “solid” to “strong.” The statement side-by-side comparison to September’s FOMC meeting can be read here.

What’s next? Though Powell maintained that the Fed may choose to hike rates further if warranted, markets received his press conference comments as dovish. Implied probabilities of future hikes declined, and the market now assigns only a 29% likelihood of a 25bp hike by the end of January vs. 42% yesterday. UST yield price action reflected the sentiment, as both short-term and long-term rates plummeted. The 2y UST yield (4.94%) closed below 5% for the first time since early October and the 10y yield declined to 4.73% after a 20bp move.

Treasury refunding. The Treasury refunding announcement sent rates significantly lower well before Powell contributed, as the Treasury increased its planned quarterly sales of longer-term securities by slightly less than expected. The announcement specified $112 billion in sales between 3, 10 and 30 year USTs next week, below the estimate of $114 billion. Elevated UST issuance has forced a sell-off on the long end of the curve to date, but today’s announcement assuaged fears of oversupply.