Treasurys rally after the Fed says it could begin unwinding its balance sheet ‘relatively soon’

Treasurys are rallying after the Fed held its benchmark interest rate and said that it expects the unwinding of its $US4.5 trillion balance sheet to begin “relatively soon,” so long as the economy performs as anticipated.

The decision to keep the fed funds rate in a range between 1% and 1.25% was widely anticipated as Bloomberg’s World Interest Rate Probability data showed a 0% chance the Fed would hike.

However, many on Wall Street were expecting some hints as to when the unwind might begin. And they got a little bit of clarity with the Fed saying, “The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated.”

Buying across the Treasury complex is having the biggest impact on yields in the belly of the curve, which are down close to 6 basis points a piece. Here’s a look at the scoreboard as of 2:30 p.m. ET:

  • 2-year -4bps @ 1.355%
  • 3-year -5.1bps @ 1.505%
  • 5-year -5.7bps @ 1.833%
  • 7-year -5.1bps @ 2.097%
  • 10-year -4.3bps @ 2.293%
  • 30-year -1.4bps @ 2.903%

Wednesday’s bid has pushed the benchmark 10-year yield back below the 2.30% threshold after it failed a test of the early-July highs near 2.35%. Traders will now be focusing on some near-term support near 2.25%. A breakdown of that level sets up the possibility of a retest of the key 2.15% level.

Curve steepening has taken hold with the 5-30-year spread widening to 107 bps. It’s not at its steepest level in about six weeks.