Bond Report: Treasury yields fall as Fed meeting gets underway

U.S. Treasury yields retreat on Tuesday as investors as investors gear up for the Federal Reserve’s policy decision on Wednesday, from which a quarter percentage point interest rate cut is expected. Read More...

U.S. Treasury yields retreated on Tuesday as investors geared up for the Federal Reserve’s policy decision on Wednesday, from which a quarter percentage point interest rate cut is expected.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -2.22% slipped 3.8 basis points to 1.805%, while the 2-year note rate TMUBMUSD02Y, -1.60% fell 3 basis points to 1.735%. The 30-year bond yield TMUBMUSD30Y, -1.94% shed 3.9 basis points to 2.272%.

What’s driving Treasurys?

The U.S. central bank began its two-day meeting on Tuesday and the Fed is widely forecast to cut its benchmark interest rate by a quarter percentage point to a range of 1.75% to 2%, marking the second rate cut this year. Fed Chairman Jerome Powell is likely to outline reasons for not signalling a full easing cycle at the same time and he may underline potential stimulus measures the central bank could bring out if global risks come to the fore.

Bond traders looked on at a surge on Tuesday in overnight repo rates that are used by hedge funds and banks in the short term money market. The lack of liquidity prompted the Fed to conduct its first repo auction in a decade, temporarily buying debt Wall Street broker-dealers to inject liquidity into the market.

See: 3 things to watch as Fed meets on interest rates

Investors continued to ponder the implications of the drone strike on Saudi Arabian oil facilities over the weekend, which sent crude oil prices on their biggest daily rise since 2008 on Monday.

In economic data, U.S. industrial production rose 0.6% in August, bouncing back from an 0.1% drop in the previous month. Investors will also receive a glimpse of foreign purchases of U.S. government paper via the Treasury International Capital report at 4 p.m. Eastern.

What did market participants’ say?

“A rate cut is all but guaranteed but the stakes seem lower for this meeting. Under Jerome Powell’s tenure, his press conferences tend to be on the hawkish side. But given the broad steadiness in a swathe of data, there’s less risk that he disappoints markets,” said Tom Garretson, portfolio strategist at RBC Wealth Management.