Bonds

Treasury yields slip amid market volatility; Fed meeting ahead

U.S. government debt yields fell on Tuesday as investors fled riskier assets and geared up for a key Federal Reserve meeting.

The yield on the benchmark 10-year Treasury note sank to 2.825 percent while the yield on the 2-year Treasury bond, the coupon maturity most sensitive to Fed policy expectations, dropped to 2.652 percent. Bond yields move inversely to prices.

Stocks have suffered wild bouts of volatility as of late, with the S&P 500 dipping as much as 2 percent on Monday, marking a new low for the index. Major indexes pointed to a marginal recovery on Tuesday however.

The big news for traders this week is the Federal Open Market Committee's (FOMC) upcoming meeting, where the central bank will set interest rates. The central bank is widely expected to hike rates on Wednesday, however expectations for further rate hikes in 2019 have dampened amid concerns of a potential slowdown in economic growth.

"With one day left to wait on the Fed Rate Decision, it has gotten hard to figure out what the FOMC will do, and even more importantly, what the market wants the FOMC to do," Kevin Giddis, head of fixed income capital markets at Raymond James, wrote Tuesday.

"The bond market has taken the stance that the Fed has already missed its forecast on inflation, so this must be about keeping the economy from overheating, correct? That works except for the fact that the U.S. economy's main data pints are getting weaker, rather than stronger," Giddis added.

Jerome Powell, nominee to be chairman of the Federal Reserve, waits to testify at his Senate Banking, Housing and Urban Affairs Committee confirmation hearing in Hart Building on November 28, 2017.
Tom Williams | CQ Roll Call | Getty Images

While market participants see the odds of a December rate hike above 70 percent, investors will likely scrutinize — and react to — the Fed's outlook for 2019. Rising interest rates can be a hurdle to smaller companies that carry a high proportion of debt, so any sign that the Fed plans to continue to raise rates each quarter could weigh on corporate sentiment. The interest on loans businesses pay increases as interest rates rise.

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President Trump took aim at the Fed again on Tuesday, urging central bank members to not "let the market become any more illiquid than it already is."

"Feel the market," Trump encouraged, "don't just go by meaningless numbers. Good luck!"

Trump on Monday said he thought it was "incredible" the Fed was "even considering" another rise in the benchmark interest rate, given the "outside world blowing up around us."

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Trump's administration is trying to negotiate a deal on trade with China, in an effort to resolve the two countries' intense trade battle. Trump and Chinese leader Xi Jinping agreed at the start of the month to establish a 90-day cease-fire to prevent the escalation of tit-for-tat tariffs.