Confusion and Stasis Mark Bond Market as It Marks Time

Despite near-certainty there'll be a 25-basis-point hike this afternoon, lingering questions have traders standing still.
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The kinds of things the bond market is worrying about this morning are a testament to how open the

Federal Reserve

has become.

A few years ago, the market would spend its time during a

Federal Open Market Committee

bickering about whether the fed funds target rate would get moved or stay put. Today, just about everyone agrees the Fed will raise the funds rate a quarter-point to 5.25%. That leaves traders free to bicker about whether the Fed will raise the discount rate, whether the

policy directive will be neutral or point to further tightenings, and what kind of language the Fed will use in its statement.

But just because the people have a better idea of what the Fed is going to do, it doesn't mean they've been doing all that much. Trading has slowed to a trickle, and the 30-year Treasury, lately up 3/32 to 102 1/32 and yielding 5.98%, has been bound in a tight range for much of the morning. Volume was less than half that of the average third-quarter Tuesday, according to

GovPx

.

"Everyone's sitting around waiting for the announcement," said Mike Cloherty, senior market economist at

Credit Suisse First Boston

. With most Fed watchers assuming the committee will, as it did in June, adopt a neutral bias, the focus will be on the statement that accompanies the presumed hike.

"We'll be looking to see how it compare to the statement they made after the June meeting," said Cloherty. "The one thing you've had different since the last time is labor markets tightened a lot more. We're going to see if they express any additional concern on that."

"It comes down to how the market is positioned and the statement they make," agreed Richard Gilhooly, senior bond strategist at

Paribas Capital Markets

.

A quarter-point hike with a neutral bias should, Gilhooly thinks, help boost the two-year note. That might make for an active market for hedge funds and other spread players after the announcement. But he cautioned that bonds will also be taking cues from the way the dollar and the stock market react -- not easy things to predict. "I think there is a lot of confusion about what is going to happen today."