Treasury yields traded slightly lower on Tuesday as the Federal Reserve kicked off a two-day monetary policy meeting.
The Fed is largely expected to keep rates unchanged, but investors will look for clues about where the central bank thinks the economy is headed.
The central bank's meeting comes after its preferred measure of inflation, the core personal consumption expenditures index, remained unchanged for March. Labor conditions, however, remain, tight in the U.S.
"Many at the Fed seem to be perplexed (and a bit concerned) by the perceived disappearance of the trade-off between unemployment and inflation," wrote William Delwiche, investment strategist at Baird. "The recent drop in core inflation rates (as measured by both the CPI and PCE) seems to confirm those concerns and fits a narrative that inflation pressures are easing."
Expectations for a rate cut at this meeting are just at 4%, according to the CME Group's FedWatch tool. But the market has fully priced in lower overnight rates by October, FedWatch shows.
But Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle Investments, said the Fed could actually raise rates toward the end of the year as the data remains strong.
"I don't know how they will communicate that because they have done quite a pivot," she said. "Communication for them is getting tricky because expectations are so different among market participants."
Yields also fell after the release of mixed economic data. The Chicago Purchasing Manager Index (PMI) fell to 52.6 from 58.7 in March. Meanwhile, home prices grew at a slower rate in February on a year-over-year basis, according to the S&P CoreLogic Case-Shiller home price index.
Pending home sales rose 3.8% in March, however, thanks in part to a sharp drop in mortgage rates.