(Recasts first, sixth paragraphs, updates yields)
By Kate Duguid
NEW YORK, July 31 (Reuters) - U.S. Treasury yields eased on Tuesday after the Bank of Japan said it would maintain its ultra-loose monetary policy, though they pared losses thanks to a modest increase in U.S. inflation.
Sovereign bonds dipped globally along with Japanese government debt on Tuesday after the country’s central bank tweaked monetary policy but pledged to keep interest rates low, bringing some relief to a market that had braced for bigger changes.
Movement of Treasury yields was muted compared with the five-basis-point drop in the benchmark 10-year Japanese government bond. The yield on the U.S. 10-year note initially fell more than 3 basis points but was last down one basis point in late-morning trade.
“The direction is right but the magnitude is small. We still have a decent amount of news ahead of us,” said George Goncalves, head of U.S. rates strategy at Nomura Securities International.
The meeting of the BOJ will be followed this week by ones at the Federal Reserve on Tuesday and Wednesday and the Bank of England on Thursday.
As the Federal Open Market Committee began its two-day meeting, the Commerce Department reported that U.S. consumer spending increased solidly in June as households spent more at restaurants and on accommodation, building a strong base for the economy heading into the third quarter and bolstering the case for the Fed to continue raising rates. The personal consumption expenditures price index, a measure of inflation, rose modestly, in line with the Fed’s 2 percent target.
No change in interest rates is expected to come from the Fed’s two-day meeting. Futures traders are pricing in just a 3 percent chance that the U.S. central bank will raise rates in August, according to the CME Group’s FedWatch Tool. But the Fed’s interpretation of mixed second-quarter GDP growth data released on July 27 will be watched closely.
Market participants will be looking for adjustments to the language in Fed Chairman Jerome Powell’s policy statement. Minutes from the Fed’s June meeting said “a number of (participants) noted that it might soon be appropriate to modify the language in the post-meeting statement indicating that ‘the stance of monetary policy remains accommodative’.”
The 10-year U.S. government note last yielded 2.96 percent, down a basis point from Monday. The 30-year yield was down 2 basis points, at 3.08 percent. The drop in yields on longer-dated Treasuries drove the yield curve modestly flatter, with the spread between two- and 10-year bonds at 28.9 basis points, down from 30.8 on Monday. (Reporting by Kate Duguid; Editing by Steve Orlofsky and James Dalgleish)