US yields narrowly mixed ahead of Fed rate decision
US 10-year yields hit four-week highs
US two-year yields rise to three-week peaks
US 2/10 yield curve hits steepest level in a month
Bond investors expect a pause in 2025
Adds new comment, byline, bullets, graphic, updates prices
By Karen Brettell and Gertrude Chavez-Dreyfuss
NEW YORK, Dec 16 (Reuters) - U.S. Treasury yields were mixed on Monday in choppy trading, edging higher on the short end, as investors expected the Federal Reserve to cut interest rates by 25 basis points later this week and signal a pause in its policy easing cycle.
Earlier in the session, the U.S. benchmark 10-year yield rose to the highest in about four weeks, before trading little changed on the day at 4.399% US10YT=RR. The two-year yield advanced to a roughly three-week peak and last traded slightly up at 4.247% US2YT=RR.
The Fed is expected to end its two-day policy-setting meeting on Wednesday by sayingit is in no rush to cut ratesfurther even thoughinflation remains above its 2% annual target, and thelabor market remains relativelystrong, analysts said.
The bond market will also focus on the Fed's quarterly economic projections due on Wednesday, including rate forecasts, also known as the "dot plot." The "dots" from the September meeting, when the Fed kicked off its easing cycle with a 50-basis-point cut, showed a policy rate of 3.4% by the end of 2025.
"I definitely embrace the concept that the Fed goes on hold and let's see what fiscal policy looks like, how the budget takes shape. March may still be in play and even the first half of the year may be in play," said Tim Horan, chief investment officer, fixed income at Chilton Trust.
"If the average for the dot plot is three cuts, maybe it's going to be March and June, and we'll see where the other one falls, maybe September, maybe not, maybe wait until December. But this fine-tuning of policy to get back to neutrality can take a number of forms depending on the bigger risk and the uncertainty about fiscal policy," he added.
Fed Chair Jerome Powell had said two weeks ago that the U.S. economy was stronger than it appeared in September when the central bank began cutting interest rates. This should allow policymakers to potentially be a little more cautious in reducing rates further, he added.
Analysts expectinflation to resurge as incoming U.S. President Donald Trump introduces new tariffs.
In other maturities, the U.S. 30-year yield edged lower to 4.606% US30YT=RR.
The U.S. yield curve was little changed from Friday, with the gap between two- and 10-year maturities at 14.8 bps US2US10=TWEB. Earlier in the session, it steepened to as much as 16.3 bps, the widest spread in about a month.
The steepening of the curve suggested rate cuts are priced for Wednesday's meeting and some in 2025, with yields on the short end under control.
Treasury yields showed little reaction to Monday's data showing U.S. manufacturing activity contracted further in December, with a measure of factory output dropping to the lowest in more than 4-1/2 years,
More economicdata this week will be watched for any clues on Fed policy, though this week'skey inflation release on Friday will be too late to influence the meeting.
The Personal Consumption Expenditures Price Index, the Fed's preferred inflation measure, is expected to show that headline and core prices each rose 0.2% in November, for an annual gain of 2.5% and 2.9%, respectively. USPCE=ECI
Retail sales data for November is also due on Tuesday.
The Fed’s dot plot https://reut.rs/3VwBadS
Reporting By Karen Brettell and Gertrude Chavez-Dreyfuss; Editing by Emelia Sithole-Matarise and Richard Chang
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