(Bloomberg) -- Short-term Treasury yields rose from their lowest levels this week as investors counted down to Wednesday's Federal Reserve interest-rate decision, expected to be the first cut in 2025, with the potential for shifts in the outlook.
Bond investors are broadly expecting a quarter-point reduction to the Fed's overnight lending rate when the decision is announced at 2 p.m. in Washington.
The anticipation of lower rates has helped drive yields lower, with the 30 year's falling as much as three basis points to 4.62% on Wednesday, the lowest level since April 30. Two-year yields rebounded to around 3.53% from near 3.49%.
Wellington Management Portfolio Manager Brij Khurana expects the Fed will cut 25 basis points, alongside the possibility of three dissents for a larger move.
"The biggest problem for the bond market would be if they don't go all the way to what's priced in next year," Khurana said.
On Wednesday, the differentials between shorter- and longer-maturity Treasury yields — which had exploded in anticipation of Fed rate cuts — narrowed further, a possible indication of profit-taking on that trend. US yield-curve flattening also drew support from similar price action in Europe and Japan, where a 20-year bond auction drew strong demand.
While there's little doubt about the outcome of the decision, the Fed's broader communications around it have the potential to alter expectations for future policy decisions.
Those include the possibility that Fed Chair Jerome Powell will frame the decision as what many investors have termed a "hawkish cut," tamping down expectations for further reductions in October, December, or both, if economic data don't support them.
Short-term interest rate futures are pricing in at least one more quarter-point move by year-end, and wagers on at least one half-point cut this year have materialized.
Other potential drivers of volatility include Fed policymakers' quarterly revisions to their projections for the economy and the policy rate, which in September anticipated two quarter-point cuts by year-end.
There's also the potential for individual policymakers to dissent in favor of either a bigger rate cut or none at all. At the last meeting in July, two Fed governors appointed by US President Donald Trump dissented from the decision to leave rates unchanged in favor of cutting them.
A third Trump appointee, Stephen Miran, was sworn in Tuesday just in time to vote on today's action.
Administration officials including Treasury Secretary Bessent have said the policy rate is at least 150 basis points too high, and Trump has said it's three percentage points higher than needed.
(Recasts with updated prices.)
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