U.S. Bond Yields Fall, Market Begins to Prepare for Fed Meeting

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Most U.S. Treasury yields fell in a choppy session on Tuesday as investors await next week’s Federal Reserve policy meeting expected to announce a 25 basis point increase in the interest rate.

Debt yields rose earlier in the session and 10- and 2-year bond yields hit one-week highs, boosted by data showing the slowdown in the U.S. manufacturing and services sector eased this month.

U.S. business activity contracted for a seventh straight month in January, although the slowdown moderated in both the manufacturing and services sectors for the first time since September, while business confidence strengthened at the start of the new year.

At the same time, an S&P Global survey released Tuesday showed rising price pressure for the first time since last spring, indicating that inflation is far from contained despite aggressive moves by the Federal Reserve to contain it.

The report should bolster expectations that the Fed is likely to tighten rates again next week, but at a slower pace.

“I expect a 25 basis point increase in February and then another 25 basis points in March and then the Fed to keep the cycle on hold for the rest of the year,” said Tom di Galoma, managing director of global rates at BTIG in New York.

Late in the morning, the yield on 10-year Treasuries was down 1.5 basis points at 3.508%. Yields on 30-year bonds fell 2.3 basis points to 3.667%.

A closely watched stretch of the yield curve, which measures the gap between the yield on two- and 10-year Treasury notes, showed a sharp inversion at -72.8 basis points.

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