Treasury Action: flattening is the trade ahead of the FOMC
Treasury Action: flattening is the trade ahead of the FOMC, where a "dovish hike" is anticipated. And analysts suspect the curve could narrow further after the 14:00 ET policy announcement as the FOMC may not be as bond friendly as expected. The 5s-30s gap is almost 2 bps narrower to 40.2 bps as the back end of the curve outperforms. The bond yield down 1 bp to 3.055%, while the 5-year rate is up 0.7 bps to 2.653%. The 2s-10s is at 16.6 bps as the 10-year rate is slightly lower at 2.814%, with the 2-year up 0.6 bps to 2.648%. Accentuating the trade recently have been been the drop in energy prices and the erosion in inflation expectations. Analysts believe the market is overestimating the dovishness of the FOMC this afternoon. It that's the case, short rates should underperform, and the curves could approach the December narrows of 38.1 bps on the 5s-30s, and 11.4 bps on the 2s-10s.