July 31, 2018 / 8:11 PM / 2 months ago

TREASURIES-Yields steady as Fed expected to hold rates steady

(Updates yields, adds analyst quote, details on economic data)

By Kate Duguid

NEW YORK, July 31 (Reuters) - U.S. Treasury yields were little changed in afternoon trading on Tuesday amid widespread expectations the Federal Reserve would leave interest rates unchanged when it announces its latest policy decision on Wednesday.

Only 3 percent of traders believe a rate hike will be announced at the conclusion of the U.S. central bank’s two-day meeting, according to the CME Group’s FedWatch tool. And there will be limited insight into the thinking of Federal Reserve Chair Jerome Powell, as he is not scheduled to hold a press conference after the release of the policy statement.

“My expectation is for the Fed to be a snooze,” said Jonathan Cohn, interest rate strategist at Credit Suisse.

“We’re expecting an acknowledgement of the recent pickup in growth and inflation, but other than that for everything to remain as it was.”

As the rate-setting Federal Open Market Committee began its meeting on Tuesday, the Commerce Department reported U.S. consumer spending increased solidly in June as households spent more at restaurants and on accommodation, building a strong base for the economy heading into the third quarter and bolstering the case for the Fed to continue raising rates.

The personal consumption expenditures price index excluding food and energy components, the Fed’s preferred measure of inflation, rose 1.9 percent for a third straight month in June. The Fed’s inflation target is 2 percent.

The market anticipates the Fed will raise rates another two times in 2018, with expectations of a hike in September at 91 percent, and expectations for a fourth hike in December at 64.7 percent, according to the FedWatch tool.

On Wednesday, investors will be looking for adjustments to the language in the Fed’s statement and for the central bank’s interpretation of the second-quarter GDP data released on July 27.

In overnight trade, U.S. Treasury yields eased lower in sympathy with Japanese government bonds after the Bank of Japan said it would maintain its ultra-loose monetary policy, though they pared losses during the North American trading session thanks to the modest increase in U.S. inflation.

The yield on the U.S. 10-year note initially fell more than 4 basis points but was last down one basis point at 2.964 percent. The 30-year yield initially fell by almost 5 basis points, but recovered to 3.085 percent, just 2 basis points below Monday.

The Treasury Department’s quarterly refunding will be announced at 8:30 a.m. EDT (1230 GMT) on Wednesday. The department said in a statement it expects to issue $329 billion through credit markets during the July-September period. The borrowing estimate for the third quarter is the highest since the same period in 2010 and fourth largest on record for the July-September quarter. (Reporting by Kate Duguid; Editing by James Dalgleish and Paul Simao)

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