Fed, just a momentary thrill
One would have expected the Fed's rate cut to have more than a momentary impact on stock prices this week. But equity investors shared the same delusion as bond investors, inventing last minute hopes the Fed would cut rates by a whopping 75 points. Disappointed, and pretty much following the adage of "buy the rumor, sell the fact," investors took profits on Wednesday after the rate announcement. Week-on-week, only the Dow Jones Industrials and Russell 2000 posted gains. The S&P 500 held nearly steady. The Nasdaq composite took a hit as high tech profit warnings and layoff announcements took their toll.

Treasury securities rally on Fed action
Bond investors were less disappointed with the Fed's 50 basis point reduction in the federal funds target. They were hoping for more and immediately determined that the Fed would act again before the next FOMC meeting in March. The weekly change in Treasury yields are a bit misleading, understating the positive impact of the Wednesday rate cut as yields increased about five basis points across the board on Monday. Yields subsequently came down through the week, until drifting higher on the employment report on Friday. The 30-year bond yield increased 5 basis points on Friday and the 2-year note gained 9 basis points after the economic news disappointed.

Treasury securities are not only affected by Federal Reserve policy. The U.S. Treasury issued a report this past week that showed further shifts in the supply of Treasury securities. For instance, the 52-week bill will be eliminated after the February auction. Last year, this security was reduced to quarterly from monthly issuance. Also, there was a recommendation by primary dealers to eliminate the 30-year bond entirely. The Treasury has not made a decision yet, but many expect the August auction of the venerable long bond to be the last. Government surpluses mean the Treasury has a reduced need to borrow; the supply of Treasury securities will be reduced going forward. The path is not yet known, but underlying demand for these ever more scarce securities could continue to boost prices and help contain yields.