BOND REPORT: 2-year Treasury Yield Ticks Up As Investors Brace For Updated Fed Monetary Policy

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

Wall Street is pricing in a 99.6% chance of a rate increase by the FOMC on Wednesday, CME data show

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U.S. Treasury yields were mixed Tuesday as the Federal Reserve began its two-day policy convention, which could influence buying of government paper.

The yield on the two-year note , which is the most sensitive to changes in Fed policy, was up 0.4 basis points at 1.363%, stretching its streak of gains for the fifth session in a row. Bond prices move inversely to yields; one basis point is one hundredth of a percentage point.

The yield for the benchmark 10-year Treasury note, fell 0.9 basis points to 2.206%, while the 30-year bond, also known as the long bond, declined 0.9 basis points to 2.860%.

Trading in Treasurys saw muted action after a key reading on inflation, the producer-price index for May, was unchanged. PPI was flat last month following a sharp 0.5% increase in April, the government said Tuesday. Economists surveyed by MarketWatch had predicted no change in the PPI.

Read:Wholesale inflation flat in May as falling energy prices offer respite (http://www.marketwatch.com/story/us-wholesale-inflation-eases-in-may-but-still-elevated-ppi-shows-2017-06-13)

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Investors in government bonds closely watch measures of inflation because it can have a corrosive effect on a bond's fixed payments, stoking selling in Treasurys when inflation is seen rising.

Tuesday's main action, however, was the beginning of the Federal Open Market Committee's meeting, which will see an updated policy statement and projection of members of the Fed's outlook for interest rates, followed by Chairwoman Janet Yellen's news conference. Treasury yields have traveled in a holding pattern ahead of the key rate decision.

Although the Fed is widely expected to lift interest rates a quarter-point, with the probability of a rate increase on Wednesday at 99.6% (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html), the main focus will be the central bank's message on the health of the U.S. market, coming after some data has offered signs of weakness in the U.S. labor market and economy. The U.S. added a meager 138,000 new jobs (http://www.marketwatch.com/story/us-adds-138000-jobs-in-may-unemployment-drops-to-16-year-low-of-43-2017-06-02) in May, adding to evidence that the tightest labor market in years is making it harder for companies to fill open jobs.

Wall Street strategists have made the case that weaker-than-expected data may make it difficult for the Fed to lift rates at as fast a clip as the central bank has previously been communicating, casting some doubt on the likelihood of an interest-rate hike in September -- the next time the Fed is set to meet.

Read: Here's what the Fed will signal when it hikes interest rates (http://www.marketwatch.com/story/heres-what-the-fed-will-signal-when-it-hikes-interest-rates-2017-06-12)

But others expect (http://www.marketwatch.com/story/yellen-may-be-forceful-in-press-conference-when-defending-feds-interest-rate-path-2017-06-13)Yellen to push back to shift investors' expectations for further monetary tightening during the year. The FOMC is on track to lift rates four times since Dec. 15, as it attempts to normalize monetary policy in the wake of the 2008-'09 financial crisis.

"We think that the 'tone' will be a mildly 'dovish'-sounding 'wait-and-see,' prompted more by the uncertainty surrounding fiscal policy in Washington, and less be a lack of confidence over inflation," said Thierry Wizman, interest rates and currencies strategist for the Macquarie Group.

A plan to normalize monetary policy also comes as other central banks, most recently the European Central Bank, continue to maintain a relatively dovish, or accommodative, posture.

That accommodation in much of the rest of the world has made Treasurys more attractive, pushing yields down, despite the central bank's initiative to lift the fed-funds rate off the floor. Both the U.S. dollar -- as measured by the ICE U.S. Dollar Index , which tracks the greenback against a basket of six currencies -- and Treasury yields have been trading around multi-month lows.

Further complicating the U.S. central bank's agenda is the S&P 500 index and the Dow Jones Industrial Average , that has been ringing up repeated records in the wake of promises by President Donald Trump for a raft of fiscal stimulus measures, including deregulation, tax cuts and infrastructure spending, that would theoretically deliver a jolt to the economy and so-called risk assets like stocks.

"With the two-day FOMC meeting getting under way, many will be watching Treasury yields and the U.S. dollar carefully after both showed evidence of bottoming near-term and bouncing last week," wrote Mark Newton, chief market technician at Newton Advisors Inc.

Yields were little changed after a sale of $12 billion of 10-year notes attracted middling demand from buyers. Treasury auctions can influence trading for the overall market.

Those wary of lingering geopolitical concerns from the White House closely followed a hearing on Capitol Hill featuring Attorney General Jeff Sessions, who is appearing before the Senate Intelligence Committee (http://blogs.marketwatch.com/capitolreport/2017/06/13/attorney-general-jeff-sessions-testifies-to-senate-about-russia-probe-live-blog-and-video/), which is investigating Russia's ties with members of Trump's administration. Sessions called any claims he collaborated with Moscow to advance Trump's election campaign an "appalling and detestable lie."

In Europe, the 10-year German bond , known as the bund, was at 0.27%.

(END) Dow Jones Newswires

June 13, 2017 17:37 ET (21:37 GMT)