Bond Report: Treasury yields decline as investors look forward to Fed decision

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U.S. Treasury yields fell Tuesday as the Federal Reserve began its two-day meeting, where its policy making committee is expected to lower interest rates for the third time this year.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.67%  was down 1.8 basis points to 1.835%, while the two-year note rate TMUBMUSD02Y, -0.47%   edged 0.8 basis points lower to 1.640%. The 30-year bond yield TMUBMUSD30Y, -0.25%   fell 1.8 basis points to 2.330%.

What’s driving Treasurys?

The Federal Open Market Committee is likely to cut its benchmark fed funds rate down to a range between 1.50%-1.75% on Wednesday, based on market pricing.

At the same time, analysts say the central bank is likely to couple the decision with little forward guidance in its policy statement and the post-meeting news conference. In that way, the Fed could stay aligned with its previously stated stance that recent rate cuts are part of a “mid-cycle” adjustment, giving time for the U.S. central bank to see how the impact of more accommodative monetary policy and easing international trade tensions shake out.

See: Three things to watch from the Fed meeting

In the U.K., the Labour party said it would support the Prime Minister’s Boris Johnson’s bill to hold an early election in mid-December as he tries to secure a breakthrough on a Brexit deal.

On the trade front, a Trump administration official said that the “phase one” U.S.-China trade deal may not be signed at the upcoming Chile summit, and added that further time was needed.

See: Bond investors confident of Fed rate cut this week but pare bets on further easing

News reports said Japanese insurance companies were raising their allocations to foreign bonds and stocks for the six months through March 2020. Japanese insurers carry significant holdings of U.S. Treasurys and corporate debt because they offer richer returns than Japanese sub-zero-yielding government debt.

In economic data, Case-Shiller home prices increased 3.2% year-over-year in August. The U.S. Conference Board’s consumer confidence index rose to a reading of 125.9, below the expectations of economists polled by MarketWatch who had forecast a reading of 128.3, but still at relative historical highs. Pending home sales rose 1.5% last month.

What did market participants say?

“It’s a very sensitive situation and largely has to do with [the fact that] the Fed doesn’t want to have to continue to cut interest rates. Problem is, they’re almost being forced by the market to do so,” said Nick Maroutsos, co-head of global bonds at Janus Henderson Investors.

“The economy is clearly showing that we’re not heading into a recession anytime soon, especially when we saw such a massive tax stimulus in 2017. Regardless of a trade war and a modest slowdown, we have consumer confidence numbers where they are,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, in an interview with MarketWatch.