U.S Treasury bonds flat ahead of Federal Reserve meeting

The U.S Treasury bonds were trading modestly firmer on Monday as investors await this weeks FOMC meeting and Federal Reserve Chair Janet Yellen speech in an attempt to estimate the Fed's likely next step to raise interest rate.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, moved lower 0.29 pct to 1.883 pct and the yield on the 3-year Treasury bond dipped 0.56 pct to 0.995 pct by 1245 GMT.

The United States Treasury bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Federal Reserve's target. Today, crude oil prices also lost ground as traders took profit following the weekly surge after Crude oil prices jumped to 5-month high and report that Saudi Arabia could maintain its total crude output volume with the expansion of an oilfield, injecting fresh concerns about the global supply glut. The International benchmark Brent futures fell 0.53 pct to $44.83 and West Texas Intermediate (WTI) tumbled 0.96 pct to $43.31 by 1130 GMT.

The U.S. Federal Reserve policymakers meet on April 26-27 and markets largely expect that interest rates will be kept steady with a slim possibility of a surprise hike. Focus will be on the press statement and whether there is a shift across the Fed members to a more hawkish stance.  Even subtle changes in the wording of its statement will tell us a lot about the probability of a June hike. Recent comments have been far more hawkish than the market is currently pricing in on rates.

"I don't think they can pull off a June hike without triggering another round of volatility, and they don't want that because the selloff in January and February left a deep scar. The FOMC can't go too hawkish overnight because markets aren't pricing in anything close to that." said Aneta Markowska, chief U.S. economist at Societe Generale.

Data have been mixed since the previous meeting. The labour market data have been strong. Inflation has fallen back somewhat, while market based inflation expectations have risen. GDP was revised up to 1.4% (saar) for Q4, but growth has likely slowed in Q1. Business confidence has improved, while consumer demand has slowed. Financial markets volatility has abated, and commodity prices have risen. The trade-weighted USD has weakened.

Some broad macroeconomic indicators support the view that the economy is continuing to expand, albeit at a slower pace than in 2014 and 2015. However, weakness in retail sales and international trade, as well as concern about China's economy, are among reasons Fed Chair Janet Yellen will stay cautious about further rate hikes before the second half of the year. Fed may need more tangible evidence of higher inflation and growth before it makes any move towards normal levels of interest rates.

Markets now shift focus to a the greater flow of data in the week ahead, highlighted by the April FOMC statement on Wednesday and advance 1Q16 GDP data on Thursday. Meanwhile, S&P 500 Futures fell 0.20 pct to 2,081.75 by 1255 GMT.