Treasuries Close Moderately Higher As Fed Decision Looms

(RTTNews) - After turning lower over the course of the previous session, treasuries moved steadily higher during trading on Tuesday.

Bond prices initially showed a lack of direction but climbed firmly into positive territory as the day progressed. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 3.4 basis points to 2.843 percent.

The strength among treasuries came as traders looked ahead to the announcement of the Federal Reserve's monetary policy decision on Wednesday.

Recent upbeat economic data has led some economists to predict that the Fed will announce plans to begin scaling back its asset purchases, although others still expect the central bank to put off tapering until next year.

Some buying interest may have been generated by the release of a Labor Department report showing that consumer price inflation remained tame in the month of November.

The report showed that the consumer price index was unchanged on a monthly basis and rose at an annual rate of 1.2 percent.

While the annual growth reflects an acceleration from the 1.0 percent increase seen in October, Rob Carnell, chief international economist at ING, said inflation remains low enough for the Fed to use it as an excuse not to start the taper tomorrow.

"If the Fed chooses to use these tomorrow as an excuse not to start the taper, then it suggests to us that they didn't want to start the taper anyway," Carnell added.

Meanwhile, traders largely shrugged off a separate report from the National Association of Home showing that homebuilder confidence improved by much more than expected in the month of December.

Treasuries also benefited from a positive reaction to the Treasury Department's auction of $32 billion worth of two-year notes, which attracted well above average demand.

The two-year note auction drew a high yield of 0.345 percent and a bid-to-cover ratio of 3.77, while the ten previous two-year note auctions had an average bid-to-cover ratio of 3.26.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

All eyes are likely to be on the Fed on Wednesday, with the announcement of the policy decision due at 2 pm ET followed by Chairman Bernanke's press conference at 2:30 pm ET.

The Fed meeting is likely to overshadow the release of the Commerce Department's report on housing starts in September, October, and November as well as the Treasury's auction of $35 billion worth of five-year notes.