U.S. government bond prices surged Tuesday after the Federal Reserve trimmed interest rates by a shallow 25 basis points, disappointing stock market investors and sending a robust safe haven flow into Treasurys.
A 25 basis points cut in the target rate had been fully factored in. But stock markets apparently hoped for a more aggressive rate reduction to slash borrowing costs and make borrowing easier for companies.
"Treasurys are extending their gains entirely on stock market weakness," in the aftermath of the Fed rate decision, said Donald Coxe, global portfolio strategist with BMO Capital Markets in Chicago. "When the stock market started selling off, that's when the 10-year note rallied. We are getting a standard safe haven approach," said Coxe.
The 10-year note rallied sharply, gaining more than a full point in price. Highly rated Treasurys tap safe harbor bids when riskier assets such as stocks sell off.
The 10-year's price climbed 1-6/32 for a yield of 4.02 percent, versus 4.09 percent before the Fed decision and compared with 4.16 percent late Monday. Bond yields and prices move inversely.
"I believe we know now there were a lot of people out there who expected a 50 basis points cut and they are taking a lot of money off the table in stocks," said Coxe.
The Dow Jones industrial average fell about 1.4 percent to 13,531 points.
The Fed trimmed the fed funds target rate, the benchmark overnight lending rate, by 25 basis points to 4.25 percent and also trimmed the discount rate, at which banks can borrow directly from the Fed, by 25 basis points to 4.75 percent.
The two-year note -- which responds closely to central bank interest rate moves -- traded up 12/32 in price for a yield of 2.97 percent, versus 3.08 percent before the Fed announcement and compared with 3.18 percent late Monday.
The 30-year bond (US30YT-RR) gained 2-4/32 in price for a yield of 4.50 percent.