Yield on 10-year Treasury below 5% as investors await Fed decision

U.S. Treasury yields were lower on Wednesday as investors awaited the outcome of the Federal Reserve's two-day September meeting.

The benchmark 10-year Treasury note yield was down more than 3 basis points at 4.961%, while the yield on the 30-year Treasury bond fell more than 2 basis points to 5.341%. The 2-year Treasury note yield dropped more than 4 basis points to 4.619%.

One basis point equals 0.01%, and yields and prices move in opposite directions.

The Fed's Federal Open Market Committee is set to announce its latest monetary policy decision at 2 p.m. ET on Wednesday.

Fed funds futures were last pricing in a 92.7% chance of a quarter-point hike, according to the CME FedWatch tool, up from a 33% likelihood a month ago.

Data released on Friday showed the U.S. annual inflation rate hit 3.4% in August, while the most recent personal consumption expenditures price index — which the Fed uses as its preferred forecasting tool — increased by 3.7% on an annual basis in July. Oil prices, meanwhile, remain above $100 a barrel, adding to inflation concerns.

The hot inflation data has put pressure on the long end of the Treasury curve in recent weeks, pushing the 10-year Treasury yield to a post-2007 high on Tuesday.

Brent Wilsey, chief investment officer at San Diego-based Wilsey Asset Management, said in an emailed note on Wednesday that a hold from the Fed could have ramifications for investors and the central bank.

"If the Federal Reserve were to keep rates steady Wednesday, that could surprise stocks, and surprises are rarely received well in markets," he said. "It could also damage the Fed's credibility, and reignite concerns that the central bank is caving to political pressure to keep rates steady."

The Trump administration has repeatedly put pressure on the Fed to lower rates.

Jonathan Pryor, co-head of FX dealing at Marex, said in a Wednesday morning note that the Fed is "moving into a new phase of monetary policy."

"Earlier in the year, it looked like we were entering into a rate cutting cycle that may last for six or twelve months, but now it feels like the tables have turned," he said.

"Central banks are trying to make sensible decisions and tackle inflation, predominantly supply-side inflation, at a time when global bond markets are receiving significant attention. It is a difficult balance to strike, and one that markets are acutely aware of."