September 26, 2018 / 2:20 PM / 6 months ago

TREASURIES-U.S. yields slip ahead of Fed rate decision

    * Fed widely seen raising interest rates at policy meeting
    * Traders await fresh clues on rate-hike path into 2021
    * Longer-dated U.S. yields retreat from 4-month highs

    By Richard Leong
    NEW YORK, Sept 26 (Reuters) - U.S. Treasury yields fell on
Wednesday with longer-dated yields receding from four-month
highs as traders braced for a possible third interest rate
increase this year from the Federal Reserve in response to solid
economic growth.
    Bond yields had risen in recent days on bets the Fed may
lift rates more times this year than previously thought, and as
worries eased over trade tensions between China and the United
States and competition from higher-yielding corporate bond
    The Federal Open Market Committee, the central bank's
rate-setting group, has been widely expected to increase its
target range on key overnight borrowing costs by a quarter point
to 2.00-2.25 percent after a two-day policy meeting.
    Fed officials will also provide their first projections on
the economy and interest rates in 2021, which traders would use
to determine the number of rate hikes in the coming months
    Further rate increases put the Fed into "tightening"
territory, where borrowing costs would run above the core
personal consumption expenditure (PCE), the Fed's preferred
inflation gauge, and slow business and consumer activities,
analysts said.
    "The market has priced in ‘real’ tightening in early 2019 –
where the target is well in excess of core PCE," said Jim Vogel,
interest rate strategist at FTN Financial in Memphis, Tennessee.
 "Two more years of hikes past that date would still represent a
long tightening phase against old-style Fed cycles."
    Interest rate futures implied traders fully expect the FOMC
to raise rates at its latest policy meeting. They also
signaled they saw an 82 percent chance of a rate increase to
2.25-2.50 percent at FOMC's Dec. 18-19 meeting, CME
Group's FedWatch program showed.
    For 2019, traders are pricing in the chance of two rate
increases, according to rate futures. This compared with a
median outlook for three hikes among Fed officials in their
projections released back in June.
    The Fed will release its rate decision and economic
projections at 2 p.m. (1800 GMT), followed by a press conference
from Fed Chairman Jerome Powell at 2:30 p.m. (1830 GMT).
    At 9:57 a.m. (1357 GMT), benchmark 10-year Treasury yield
 was 3.085 percent, down 2 basis points from Tuesday.
On Tuesday, it reached 3.113 percent, its highest since May,
Reuters data showed.
    The 30-year yield was down nearly 2 basis points
at 3.083 percent after hitting a four-month peak of 3.249
percent on Tuesday.
    Two-year yields slipped 1 basis point to 2.831
percent after touching 2.847 percent on Tuesday, which was last
seen in June 2008.
September 26 Wednesday 9:58AM New York / 1358 GMT
 US T BONDS DEC8               140-3/32     10/32     
 10YR TNotes DEC8              118-148/256  4/32      
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.175        2.2174    0.002
 Six-month bills               2.315        2.3749    -0.005
 Two-year note                 99-214/256   2.8351    -0.008
 Three-year note               99-144/256   2.9048    -0.011
 Five-year note                99-134/256   2.9783    -0.016
 Seven-year note               98-44/256    3.0446    -0.015
 10-year note                  98-56/256    3.0852    -0.017
 30-year bond                  95-216/256   3.2174    -0.016
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       24.80        -0.50     
 30-year vs 5-year yield       23.90        -0.50     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        16.50         0.25    
 U.S. 3-year dollar swap        16.25         0.25    
 U.S. 5-year dollar swap        11.50        -0.50    
 U.S. 10-year dollar swap        5.50         0.25    
 U.S. 30-year dollar swap       -7.00         0.25    

 (Reporting by Richard Leong; Editing by Bernadette Baum)
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