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Treasury yields dip as Fed prepares to start two-day policy meeting

U.S. bond yields fell early Tuesday ahead of the Federal Reserve starting its two-day policy meeting.

What’s happening

  • The yield on the 2-year Treasury
    eased 2.1 basis points to 4.308%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    fell 2.3 basis points to 4.056%.

  • The yield on the 30-year Treasury
    dipped by 3.1 basis points to 4.286%.

What’s driving markets

Ten-year Treasury yields nudged back down to within several basis points of the 4% mark, having dipped sharply in the the previous session following news the U.S. government was looking to borrow less than expected in the first quarter, and thus likely to have to sell fewer bonds.

“The market will next be watching the details of the Treasury’s coupon auction sizes in tomorrow’s refunding statement,” said Jim Reid, strategist at Deutsche Bank. “Recall that the last quarterly refunding announcement on 1 November marked the start of the dramatic bond rally into year-end.”

The pullback in benchmark borrowing costs came ahead of the Federal Reserve on Tuesday starting its two-day monetary policy meeting, at which it is expected to make the decision to leave its benchmark interest rates at a range of 5.25% to 5.50%.

Investors will be focused on the Fed’s accompanying policy statement, and comments from Chair Jerome Powell at his press conference, for guidance on the chances of a rate cut in coming months.

The probability of at least a 25 basis point rate cut by the Fed’s next meeting in March is priced at 47.6%, down from 88.5 a month ago following some better than expected economic data of late.

A team of economists at Bank of America, led by Michael Gapen, said recent comments from Fed officials suggest the central bank is pleased with the overall state of the economy and the progress made on reducing inflation and this may help them to ease policy next time, though they won’t signal so on Wednesday.

“The Fed needs to buy time to see more data,” said BofA. “We think the policy rate guidance needs to change again as we believe the current upside hiking bias in the statement remains untenable. The language is likely to become more neutral but the direction of travel of recent changes would signal some easing bias.”

U.S. economic updates set for release on Tuesday include the S&P Case-Shiller home price index for November, due at 9 a.m. Eastern, followed at 10 a.m. by the December job openings report and January consumer confidence.

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