TREASURIES-10-year yield dips below 4% as investors await Fed

(Adds investor quote, adds details of quantitative tightening, adds details of Treasury auctions, updates market activity)

By David Randall

NEW YORK, Jan 31 (Reuters) – U.S. Treasury yields slid Wednesday morning after a weaker than expected reading of private payrolls as investors awaited the closely-watched Federal Reserve interest rate decision.

The Federal Reserve two-day policy meeting will conclude this afternoon. Markets have priced in a near-certainty that the central bank will leave benchmark interest rates in their current range, though they remain on edge to hear whether the Fed expects to begin cutting rates in March.

Futures markets are now pricing in a rate cut in May, later than earlier expectations of March at the beginning of the year. Overall, market participants expect a cumulative cut of 141 basis points by the Fed’s December meeting, down from expectations of more than 160 basis points in cuts at the start of January.

At the same time, investors will be waiting to hear any details on the Fed’s plan to end the wind down of its balance sheet, a process known as

quantitative tightening

. Roughly $1.3 trillion of bonds have rolled off the Fed’s balance sheet that topped out at around $9 trillion in mid-2022, decreasing liquidity in the market overall.

“Everything hinges on the Fed,” said Matt Lloyd, chief investment strategist at Advisors Asset Management. “The market is leading up to a seminal moment with what is going to happen with QT, which may be a more important factor than if they signal a rate cut,” he said.

The yield on 10-year Treasury notes was down 6.7 basis points to 3.990%, leaving it near two-week lows. The yield on the 30-year Treasury bond was down 4.7 basis points to 4.231%.

Private payrolls increased by 107,000 jobs last month, the ADP National Employment Report showed on Wednesday. Economists polled by Reuters had forecast private payrolls rising 145,000. Job growth for December was revised lower as well.

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The U.S. Treasury Department said on Wednesday it plans to continue gradually raising coupon auction sizes through April, but beyond that it does not expect further increases for at least the next several quarters.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 9.3 basis points at 4.266%.

(Reporting by David Randall; Editing by Andrew Heavens and Franklin Paul)