TREASURIES-US yields marginally higher as markets await Fed guidance on rate cuts

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 29 (Reuters) - U.S. Treasury yields were largely steady to slightly higher on Wednesday, as investors remained cautious ahead of the Federal Reserve's policy decision, seeking more clarity on the central bank's path for interest rate cuts through the remainder of this year and into 2026.

The Fed is widely expected to lower its benchmark interest rate by 25 basis points at the conclusion of its two-day meeting later on Wednesday. Investors will closely analyze Fed Chair Jerome Powell's comments for signals on the extent of future easing, particularly in relation to the neutral rate where monetary policy is considered neither stimulative nor restrictive.

"We've been pretty range bound recently, and it seems fairly unlikely that the Fed is going to do anything too surprising," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte, North Carolina.

"Powell made some comments earlier that the September easing was a risk management rate cut, which the market at least briefly took to mean that it's not a restarting of a forward-looking cycle of rate cuts," he added. "But what we've heard from Fed policymakers since then seems to indicate, for now, that they prefer to focus on labor market weakness relative to sticky inflation, and a greater willingness to look through some of the tariff-driven inflation."

Also in focus would be the Fed's remarks on when the central bank might end its balance sheet reduction program, known as quantitative tightening (QT). Powell recently signaled that the end of QT is approaching — fueling speculation that the Fed could announce that conclusion later on Wednesday.

The end of QT should be bullish for Treasuries because it diminishes their supply in the market, pushing prices higher and yields lower. An exit from QT also means the Treasury's financing requirements would decline because it no longer needs to borrow as much to cover the Fed's redemptions.

U.S. rate futures pricing on Wednesday indicated another 25-bps rate cut in December, with an 85% probability, according to LSEG calculations. For 2026, the Fed funds futures market has priced in about three more quarter-point cuts.

In late morning trading, the benchmark 10-year Treasury yield was up one bp at 3.991% US10YT=RR, while the two-year yield, which reflects interest rate expectations, was flat at 3.5% US2YT=RR.

U.S. 30-year bond yields were up 1.5 bps at 4.562% US30YT=RR.

The yield curve steepened a touch on Wednesday, with the spread between U.S. two-year and 10-year yields at 49.1 bps US2US10=TWEB, from 48.4 bps late on Tuesday.

The curve exhibited a bear steepening pattern, with long-term rates rising slightly faster than short-term ones. Analysts said this often reflects growing inflation expectations. However, Wednesday's move may also represent a temporary reversal from the recent flattening trend seen in prior sessions.