U.S. Treasury yields fell in Asian trade on Tuesday, as investors focus on the Federal Reserve's monetary policy decision on Wednesday.
The two-year Treasury yield declined 0.5 basis points to 4.704%, while the 10-year yield fell 0.8 basis points to 4.977%, according to Tradeweb.
Markets currently assign an 89.5% probability to the Fed leaving the fed funds target rate range at 3.75%-4.00%, although a 25-basis-point hike is expected in December, according to LSEG data.
"We expect the FOMC [Federal Open Market Committee] to hold the policy rate at 3.75%-4.0% while keeping a clear tightening bias," Pimco economist Tiffany Wilding said in a note. "The most likely next move is a 25-basis-point rate hike in December," she said.
The Fed will not release new economic projections this month, therefore markets look beyond the decision. Wilding's focus at the upcoming meeting will be how Chairman Kevin Warsh will frame the [anticipated] hold, whether the majority of the FOMC still characterize the September move as a risk management adjustment and how many officials dissent in favor of a hike.
"We see both the September hike and the overall rate path outlook as a recalibration, with one or two more hikes still to come that would effectively reverse last year's cuts," Wilding said.
Russell Investments expects a "hawkish hold" in October with the Fed delivering one more hike at year end, said global investment strategist Paul Eitelman. In a "hawkish hold" the Fed leaves interest rates unchanged, while it signals that future interest-rate hikes are possible or that interest rates will stay higher for longer.
Growth has been solid, supported by strong earnings, the AI buildout, and resilient consumer spending, Eitelman said. Meanwhile, price pressures have picked up, failing Fed Chairman Warsh's test that underlying inflation moves down to the Fed's target clearly and at sufficient speed, Eitelman added.
Prior to the Fed decision, investors also await the Treasury's $70 billion auction of five-year notes on Tuesday.
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