US Treasury debt prices gave up most gains to trade narrowly mixed on Tuesday, as investors braced for the possibility the Federal Reserve could strike a more upbeat tone on the economy and consequentially raise interest rates at a faster pace than many initially expected. After rallying for the past day and a half, Treasuries backtracked, led by selling in short-dated maturities, such as US two-year notes, which are the most sensitive to rate increase expectations.
Treasuries also sold off in line with a decline in prices of German Bunds, which fell for a second straight day. Weak US retail sales data for last month, along with sharp downward revisions for January, kicked off buying in the US government bond market, with some analysts saying the data has dimmed the outlook for future US rate increases. That rally in Treasuries has since faded.
"This is actually setting up for tomorrow," said Justin Lederer, Treasury analyst at Cantor Fitzgerald in New York. "People are not looking for a rate hike tomorrow but a strong possibility in June and maybe even April."
Many in the market say that while the Fed is unlikely to raise rates at Wednesday's meeting of the Federal Open Market Committee, it is likely to emphasise that as long as US inflation and jobs continue to strengthen, the US central bank is likely to resume its tightening stance.
New forecasts from the Fed's 17 officials released after the meeting are expected to signal two or three rate increases this year in projections known as "dot plots," economists say and Fed officials themselves have suggested.
"I expect the Fed to stay on the high road, citing resilient US economic performance and nascent signs of inflation, and posit three rate hikes in the revised dot-plot," said Brian Dolan, head market strategist, at DriveWealth LLC in Chatham, New Jersey.
The rate futures market sees a 50 percent likelihood the Fed will raise rates for the first time this year in June, rising a tad from 49 percent before the release of the retail sales data, according to CME Group's FedWatch program.
A second rate increase by December rate is seen as having a 80 percent chance, up from 76 percent before the data.
In late trading, the benchmark 10-year note was flat on the day to yield 1.962 percent, compared with 1.964 percent on Monday.
The 30-year bond was last up 5/32 in price to yield 2.723 percent, down from 2.733 percent late on Monday.