U.S. Government-Bond Yields Fall Ahead of Fed Decision

U.S. government bonds strengthened Wednesday ahead of the Federal Reserve’s afternoon interest-rate decision, pushing yields lower for the third straight session. In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 1.754%, according to Tradeweb, compared with 1.805% Tuesday.

Yields, which fall when bond prices rise, have drifted lower this week after rising sharply earlier in the month.

While there have been no major economic developments, analyst say geopolitical tensions in the Middle East have helped increase demand for safer assets such as Treasurys. Supply pressures have also eased, with sales of corporate and government bonds declining following a rush of issuance in previous weeks. The flood of new bonds entering “the market over the previous two weeks had started to weigh on the market,” said Daniel Mulholland, head of U.S. Treasury trading at Crédit Agricole.  “Then of course you have new events like the Saudi oil attack that have seemingly brought in some flight to quality buyers.” Wrapping up their two-day policy meeting on Wednesday, Fed officials are widely expected to cut their short-term benchmark interest rate by a one quarter of a percentage point to a range between 1.75% and 2%. Because that cut has been anticipated for weeks, it could, on its own, have little impact on the bond market. Traders though will be paying close attention to signals that officials send about the future path of rates. Any sign that the central bank is hesitant to cut rates again this year would likely push bond yields higher, particularly on short- and medium-term bonds, according to investors and analysts. Wednesday’s trading came amid continued volatility in short-term financing markets. The Federal Reserve Bank of New York injected cash into money markets for the second consecutive day, aiming to bring down overnight lending rates that have spiked in recent days. Write to Sam Goldfarb at sam.goldfarb@wsj.com

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