US Treasury prices edged up on Tuesday after a report showing some pockets of weakness in the housing sector, while trading was cautious as the Federal Reserve began a two-day meeting which investors hope will offer clues on policy.
News that US housing starts rebounded in February after a sharp drop in January initially pared benchmark 10-year Treasuries' price gains. But surprisingly weak building permits and a downward revision in January starts stopped the pullback in bonds.
The market was also looking to recover after losing ground in the four previous sessions, so investors were more inclined to seek signs of weakness in the housing report.
Late in New York, the 10-year Treasury note's price was up 4/32, for a yield of 4.55 percent, down from 4.57 percent late on Monday. Bond yields and prices move inversely.
Dealers said the jump in housing starts in February could ultimately delay recovery in the struggling sector by adding more unsold supply, nudging the Fed to ease rates in coming months.
"Although not at this meeting, people are still biased towards the Fed cutting rates. That is the dominant trend and why they were able to shrug off today's housing report," allowing Treasury prices to rise, said Jack McIntyre, associate portfolio manager on a team that manages about $20 billion of global fixed income at Brandywine Global Investment Management in Philadelphia. The 30-year bond was 2/32 higher in price, yielding 4.71 percent. Two-year notes were up 1/32 to yield 4.61 percent. Markets were expecting the Fed to leave the overnight federal funds rate on hold at 5.25 percent when its policy-setting meeting ends on Wednesday.
However, "The wording of the Fed statement is on everyone's mind. People are squaring positions ahead of that," said Mario DeRose, fixed-income strategist at Edward Jones in St. Louis, Missouri.
Investors will focus on what the central bank's policy-makers say about inflation and growth after stronger-than-expected price data last week, and whether problems in the market for subprime mortgages - loans to riskier borrowers with poor credit histories - will slow the economy. Dealers say the Fed is unlikely to soften its anti-inflation rhetoric, with price growth remaining above its comfort zone of 1-2 percent.
"Any indications that the Fed will remain on hold for some period of time could cause a Treasuries selloff: that is the risk," DeRose said. Investors are seeking the Fed's latest views on whether the mess in the subprime mortgage market will affect the broader economy or remain relatively contained.