Treasury yields stall lower

US Treasury yields were lower, though moves were generally muted, on Tuesday, the first of the two-day Federal Reserve policy meeting after which it is expected to announce its third interest-rate cut this year.

Traders are currently pricing in a 97.3% chance of a cut tomorrow, up from 49.2% a month ago, according to CME Group's FedWatch tool.

Such a move Wednesday would be understood as a third "insurance cut," in which rates are lowered not because the United States is heading into recession, but in order to extend ongoing economic expansion, especially amid turmoil in foreign markets.

"It's calm before the storm. Obviously markets believe the Fed is going to ease," said Ellis Phifer, market strategist at Raymond James.

Though there has been no clear commitment to another reduction in borrowing costs from Fed policymakers, a failure to lower rates on Wednesday could risk upending financial markets that are confident another cut is coming.

"A really bad day would mean no cut. The market is generally thinking the Fed is not going to be overly dovish after the fact. I don't think they can be overly hawkish just because there is no inflation and that's where the hawkishness comes," said Phifer.

US economic data has shown that the trade war with China has slowed growth in the manufacturing sector and has undermined some business confidence. That weakness, however, has not yet spread into the labor market. Last month, the US unemployment rate dropped to a near 50-year low of 3.5%. The government payrolls report for October will be released on Friday.

The benchmark 10-year yield was 1.5 basis points lower at 1.839%. The two-year yield was 0.7 basis point lower at 1.644%.

Bond market liquidity is among the topics investors are expected to hear the Fed address on Wednesday. A cash shortage that plagued overnight lending markets in the last month is likely to flare back up heading into year-end, although measures taken by the Fed to provide liquidity means the worst of the strains are probably over.

The Fed began daily repurchase agreements in mid-September, after the repo rate for overnight loans surged to 10%, the highest since the financial crisis and far above the Fed's then maximum fed funds target rate of 2.25%.

"I think one of the things they're going to have to address is the liquidity issue," said Phifer.

On Tuesday morning, the Fed's 14-day term repo operation was oversubscribed with the Fed accepting $45 billion bids of a submitted $47.9 billion, the cap for which was $45 billion, suggesting some liquidity stress.