Treasuries Mixed After Fed's Rate Cut

Treasuries were mixed after the Federal Reserve cut short-term interest rates by 50 basis points in an intermeeting move that took the markets by surprise.

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The Fed cut the fed funds rate to 4.5% from 5% earlier today. Shortly after the cut was announced, the two-year note, which is affected most directly by expected changes in monetary policy, rose 8/32 to 99 31/32, lowering the yield to 4.266%. The 10-year benchmark note, after initially losing ground following the cut, recently gained 10/32 to 98 18/32, moving the yield down to 5.186%. The 30-year bond fell 14/32 to 95 12/32, raising the yield to 5.698%.

"I am totally surprised by this," Maryann Hurley of D.A. Davidson said of the Fed's latest move. "The bond market had pretty much ruled out an intermeeting rate cut from the Fed. And they did a 50 basis point, which is a significant action. I'm guessing that they are seeing a continued severe slowdown in the economy and that waiting on the May 15 FOMC meeting was just too long. I'm concerned about what they see and what we don't see."

Hurley said she expects the short end of the bond market, namely the two-year note, to continue to perform well.

The 10-year note and the 30-year bond are currently affected by a trend in which investors sell longer-term securities with the expectation that the economy will recover. Long-term yields rise when there's the expectation for stronger growth or potentially higher inflation. Investors also sold longer-term Treasury securities in reaction to the rally in the stock market, which was lately rising on news of the rate cut and some better-than-expected earnings statements from names like Intel (INTC Quote).