Yields fall ahead of Fed decision, after strong 20-year auction

NEW YORK – US Treasury yields fell on Tuesday as traders bet that Federal Reserve Chair Jerome Powell will adopt a relatively dovish tone when he speaks at the conclusion of the US central bank’s two-day policy meeting on Wednesday.

Strong demand for an auction of 20-year bonds helped send yields to session lows while falling stocks also reignited safe-haven demand for US government debt.

The Fed is widely expected to leave interest rates unchanged on Wednesday and investors will focus on updated economic and interest rate projections by Fed policymakers.

Powell’s comments will be watched for any further clues that the central bank is becoming more concerned about the economic outlook.

“The market had gotten a little too concerned that perhaps the Fed would continue to make inflation the central focus,” said Kim Rupert, managing director at Action Economics, but “we’re coming down on the side of not so hawkish as might have been the case.”

Powell said earlier this month that the Fed was in no rush to resume rate cuts as inflation remains above the central bank’s 2% annual target.

Investors are increasingly nervous that tariffs will slow the US economy and potentially increase price pressures, while large layoffs by the federal government are expected to lead to higher unemployment.

Interest rate futures traders see the Fed as most likely to resume interest rate cuts in June.

The yield on benchmark US 10-year notes was last down 3.3 basis points on the day at 4.274%.

The two-year note yield, which typically moves in step with interest-rate expectations for the Federal Reserve, fell 1.9 basis points to 4.034%.

The yield curve between two-year and 10-year notes flattened by around two basis points to 24 basis points.

Yields rose earlier on Tuesday after data showed that US single-family homebuilding rebounded sharply and US manufacturing production increased more than expected in February.

Thomas Simons, chief US economist at Jefferies, noted that sentiment on the economy has improved, albeit from deeply pessimistic levels.

“The data so far suggests that most of the weakness that we saw in January was a combination of bad weather and kind of a reflexive pause after a strong Q4 for a lot of things. … Incrementally it’s been not as bad as it was over the last two weeks or so,” he said.

Yields hit session lows after the Treasury saw strong demand for a USD 13 billion sale of 20-year bonds.

The debt sold at a high yield of 4.632%, more than a basis point below where it traded before the auction. Demand was 2.78 times the amount of debt on offer, the highest ratio since April.

The Treasury will sell USD 18 billion in 10-year Treasury inflation-protected securities on Thursday.

Traders are also focused on peace talks to end the Russia-Ukraine war.

Russian President Vladimir Putin agreed on Tuesday to a proposal by US President Donald Trump that Russia and Ukraine cease attacking each other’s energy infrastructure for 30 days, the Kremlin said following a lengthy phone discussion between the leaders.

Also on Tuesday, Germany’s outgoing parliament passed a massive increase in government borrowing, including a sweeping change to the country’s debt rules, as had been expected.

(Reporting By Karen Brettell; Editing by Hugh Lawson and Leslie Adler)