U.S. Government bonds gain as investors wary ahead of FOMC policy decision

The US Treasuries bonds gained Monday as investors remained cautious ahead of the Federal Reserve monetary policy decision and Fed Chair Yellen’s post-statement press conference, in an attempt to estimate the Fed's most likely step.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 1-1/2 basis points to 1.686 percent, the yield on 5-year bond also dipped 1-1/2 basis points to 1.195 percent and the yield on short-term 2-year note slid 1-1/2 basis points to 0.762 percent by 12:40 GMT.

The United States Federal Reserve in its meeting scheduled on September 20-21 and it is widely expected to leave its interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs.

The September FOMC statement as a potential rude awakening for markets who have come to interpret 'data dependence' to mean everything has to be perfect for the FOMC to act.

Given the continued support from labour markets and gradual improvement in pricing measures, coupled with a closing window ahead of the November elections, September sets itself up as quite possibly the best time to act (particularly given that supportive data is not something that can be a guarantee come the December meeting).

On Friday, the August U.S. consumer inflation report revealed a +0.2 percent m/m reading (+1.1 percent y/y), versus the unrevised unchanged m/m (+0.8 percent y/y) result that occurred in July, above expectations for a +0.1 percent m/m result.

Meanwhile, core CPI came in +0.3 percent m/m (+2.3 percent y/y) in August, largest m/m increase since February, versus the unrevised +0.1 percent m/m (+2.2 percent y/y) reading seen in July, above expectations for a +0.2 percent m/m increase.

Overall, the headline found upward pressure from an increase in owners' equivalent rent (+0.3 percent m/m), alongside an unchanged m/m result from energy prices. Despite the overall dampness seen in recent months, we expect a gradual pick-up in inflation readings will be seen in the months ahead (as suggested by headline y/y gains). However, we are unlikely to see a substantial move towards the Fed's 2 percent objective until we see greater traction from wage pressures.

Meanwhile, the S&P 500 Futures traded 9 points higher at 2,141.50 by 12:40 GMT.