Bond Report: Treasury yields hold ground before Fed policy update

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U.S. Treasury yields showed little direction in early Wednesday as traders looked forward to parsing the Federal Reserve’s policy statement and interest-rate projections in the afternoon.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.79%   edged down 0.5 basis point to 1.826%, while the 2-year note rate TMUBMUSD02Y, -0.48%   fell 0.8 basis point to 1.644%, after touching a monthlong high on Tuesday. The 30-year bond yield TMUBMUSD30Y, -0.94%   ticked lower by 0.7 basis point to 2.245%.

What’s driving Treasurys?

The Fed will provide a policy update at 2 p.m. ET that will wrap up its two-day meeting this week but interest rates are not expected to change. Investors will closely watch the statement and updated forecasts for clues on the outlook for monetary policy. The Fed has lowered interest rates three times this year and begun to expand its balance sheet through repo auctions and U.S. Treasury bill purchases.

See: Three things market participants should watch for at the Fed interest-rate meeting

Read: There’s a huge change coming from the Fed (just not today)

Market participants are unsure whether further rate cuts in the new year will be forthcoming given there is as yet no resolution to President Trump’s trade war with China.

White House advisers Larry Kudlow and Peter Navarro have both indicated that tariffs scheduled to hit Chinese goods on Dec. 15 are “still on the table,” following a report from the Wall Street Journal that said both parties were bracing for a delay of a tariff increases on China goods on Sunday, which would be read as an escalation of tensions.

In economic data, the latest U.S. consumer price index numbers for November are due at 8:30 a.m. ET. Economists surveyed by MarketWatch expect the index rose 0.2% in November from the previous month and the reading to show inflation running at a 2% annual rate.

What did market participants’ say?

“We expect the message will be a Fed on hold, with the economy currently looking like it potentially may be hitting a soft landing but with inflation still underperforming, and no developments that would lead the Fed to a “material reassessment” of the outlook,” wrote analysts at NatWest Markets.

“But it’s the dot plot and the presser that will get the most attention, and we do not see a material change in the dots since September and see the median 2020 signaling an unchanged fed funds rate,” they said. The dot plot refers to the interest rate projections issued by members of the central bank’s policy-setting group.