U.S. Government bonds rebound as markets remain volatile ahead of FOMC meet

The US Treasuries gained Wednesday as investor remained cautious ahead of Federal Reserve monetary policy decision. Also, the United States 10-year Treasury yields broke the 1.70 percent mark, the highest close of yields since June 23 this year.

The yield on the benchmark 10-year Treasury note fell 2-1/2 basis points to 1.710 percent, the yield on 5-year bond also dipped 2-1/2 basis points to 1.228 percent and the yield on short-term 2-year note slid 2 basis points to 0.786 percent by 12:30 GMT.

The Fed Governor Brainard (a voter in 2016) said the central bank should be careful in not removing accommodation too quickly, urging continued prudence before hiking. She further warranted for a stronger trend in consumer spending and evidence of stabilizing inflation before the central bank raises policy rates.

Although her speech was much anticipated (with a potential hawkish shift adding support for a September hike), her dovish tone is not particularly shocking, given her past commentary.

Moreover, markets now look ahead to another data light session on Wednesday, highlighted by import prices and the EIA weekly crude inventory update. With the FOMC media blackout period now in effect, there is not much in the way of commentary that is likely to impact rates to any great degree.

Overall, we continue to see the September meeting as a much closer call than markets are currently pricing in, though lingering dovishness may once again triumph (not that we see a decision to leave rates unchanged as any real victory).

The US CPI data are the last set of key data before the Fed meets next week. We doubt the picture here will change sufficiently to alter the inflation view held by the dovish FOMC members, reported ANZ.

Next week’s FOMC meeting is set to be interesting given the recent divergent Fed speak. The dovish view appears to be in the ascendency for now. We expect no change in policy. The Fed is extending its forecasts out to 2019. We expect there to be a flattening in the Fed’s median ‘dot plot’ with just one hike for this year and two hikes per year (compared to three in the June forecasts) thereafter, they added.

Looking ahead to later in the week, markets await retail sales, producer prices, consumer prices, Philadelphia Fed and Empire manufacturing releases.

Meanwhile, the S&P 500 Futures traded 4 points higher at 2,126 by 12:30 GMT.