NEW YORK: US Treasuries' yields fell on Tuesday as traders bought longer-dated bonds on uncertainty over whether the Bank of Japan might decide at a two-day policy meeting to add more stimulus to boost its economy.
The Federal Reserve, which is also meeting on Sept. 20-21, is widely expected to hold interest rates unchanged at 0.25 percent to 0.50 percent, and leave the door open for a hike by the end of the year.
Traders had speculated that the BOJ might lower its target interest rate deeper into negative territory and reduce its bond purchases to hold down long-dated yields.
Such a move would steepen the Japanese yield curve and alleviate the profit squeeze on domestic banks, which have been hurt by negative short-term rates and bond yields.
"The BOJ has a greater propensity to surprise the market than the Fed," said Subadra Rajappa, head of US rates strategy at SG Corporate & Investment Banking in New York.
Some traders doubt whether the BOJ, led by Haruhiko Kuroda, would act aggressively to combat deflation and weak demand given the central bank's history of falling short of market expectations.
"So few people have a handle on what they might do," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.
Skepticism about a bold stimulus plan from the BOJ has renewed demand for longer-dated US government bonds, flattening the US yield curve.
The yield gap between five-year and 30-year Treasuries flattened slightly on the day to 123 basis points after contracting to 120 basis points earlier Tuesday. It reached 130 basis points last Thursday, its widest level since June 27, according to Tradeweb.
After the BOJ announces its policy decision on Wednesday, traders will await Fed's release of its policy statement.
Futures and over-the-counter prices implied traders saw a 16 percent chance the BOJ would cut its target rate to -0.30 percent from -0.10 percent, while they priced in a 17 percent probability the Fed would raise rates, Reuters data showed.
The recent spate of weaker-than-expected US economic data has reduced expectations the Fed would raise rates on Wednesday.
On Tuesday, the government said housing starts declined 5.8 percent to an annualized pace of 1.14 million units, which was slower than what analysts had forecast.
Benchmark 10-year Treasury notes were up 2/32 in price for a yield of 1.689 percent, down 1 basis point from Monday's close.
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