US Treasury short-dated yields held firm on Tuesday with the two-year note yield hovering at its highest in more than four weeks as the Federal Reserve began a two-day meeting that may produce clues on the timing of a possible interest rate hike. Short-to-medium government yields touched session highs following a poor $34 billion five-year note auction, which fetched the weakest bidding in seven years.
Longer-dated Treasury yields, however, fell on safehaven demand tied to lower US stock and oil prices. Shorter-dated maturities lagged longer-dated issues on jitters whether the Fed would consider raising rates by year-end on signs the economic expansion remains on track. "If the Fed sees things better, you could be under water right away," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.
Worries about Britain's vote to leave the European Union and the drag it would have on the world's biggest economy have faded amid evidence of resilience in the US housing and labor sectors. Citi Research's barometer on US economic data surprises reached its highest level in over 21 months following better-than-expected readings on new home sales and consumer confidence on Tuesday.
Still, traders expect the US central bank to leave its target range on policy rates at 0.25 percent to 0.50 percent due to global risks and softness in domestic manufacturing. Interest rates futures implied traders saw a 48 percent of a US rate hike by year-end, compared with 52 percent on Monday and 45 percent a week ago, CME Group's FedWatch program showed.
The Federal Open Market Committee, the Fed's policy-setting group, will release its latest policy statement at 2 pm (1800 GMT) on Wednesday. The benchmark 10-year Treasury yield was down 1 basis point at 1.565 percent, while the 30-year yield slipped about half basis point to 2.283 percent. The two-year yield, which is sensitive to traders' view on Fed policy, was little changed at 0.762 percent after reaching 0.7780 percent, its highest since the Brexit referendum. Treasury yields initially fell in step with European government debt, which has seen yields stuck in negative territory due to purchases by the European Central Bank.