December 19, 2018 / 2:29 PM / 6 months ago

TREASURIES-Yields lowest since May before Fed rate decision

    * Fed expected to raise rates, convey dovish outlook
    * Fed rate projections for 2019 in focus

    By Karen Brettell
    NEW YORK, Dec 19 (Reuters) - Benchmark U.S. Treasury yields
fell to more than six-month lows on Wednesday as investors
awaited the conclusion of the Federal Reserve’s two-day meeting,
when the U.S. central bank is expected to raise rates but also
strike a dovish tone on future increases.
    Solid U.S. economic growth is likely to spur the Fed to
raise rates for the fourth time this year. However, investors
expect that slowing international growth, volatile stock markets
and the possibility that U.S. economic strength will weaken,
will temper previously hawkish indications of further increases.
    “It is truly a communications challenge for (Fed Chairman
Jerome) Powell, because a dovish hike is always a difficult
message to communicate,” said Ian Lyngen, head of U.S. rates
strategy at BMO Capital Markets in New York, adding that he
expects that “there will be volatility this afternoon.”
    The Fed indicated in September that three additional rate
hikes are likely next year, based on the median expectations in
its rate projections known as the “dot plot.”
    Powell in late November, however, said that the key interest
rate was “just below” neutral, a level that neither boosts nor
brakes the economy, increasing speculation that the U.S. central
bank may pause hikes sooner than previously expected.
            
    Fed Vice Chair Richard Clarida had made similarly dovish
comments less than two weeks earlier.             
    If rate hike projections on Wednesday fall to two or less
for 2019, it will be viewed as a sign that the Fed is closer to
the end of its current tightening cycle.
    Interest rate futures are only partially pricing in one rate
hike in 2019, after fully pricing in two rate hikes for the year
at the end of October, according to the CME Group’s FedWatch
Tool.
    Ten-year notes             gained 3/32 in price to yield
2.814 percent, after earlier dropping to 2.799 percent, the
lowest level since May 30. The yields have fallen from a
seven-year high of 3.261 percent on Oct. 9.

 (Editing by Nick Zieminski
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