By Daniel Kruger

U.S. government bonds bounced around the flatline Tuesday as the Federal Reserve began its latest meeting.

Yields were steady as investors anticipated that the Fed will announce a plan to trim its balance sheet as part of its effort to return monetary policy to a non-crisis footing.

The yield on the benchmark U.S. Treasury 10-year note recently traded at to 2.232%, according to Tradeweb, from 2.230% Monday. Yields rise as bond prices fall.

Traders were also analyzing reports that the European Central Bank is unsure of when to begin shrinking its EUR60 billion a month of bond purchases and that the Bank of Canada is concerned that it may risk boosting its currency too much, threatening its own recovery.

Traders also focused on the impact that the Fed's expected decision may have on the prices of stocks and other financial assets. One of the Fed's objectives in pumping money into the economy through bond purchases was to boost spending and inflation by lifting securities prices. With that policy about to unwind, traders are anticipating the stock market could lose some of its momentum.

"These guys are very sensitive to pulling back the accommodation," said Thomas Tucci, head of Treasury trading at CIBC World Markets Corp. "They don't know what's on the other side."

The Fed currently holds $4.2 trillion of bonds on its balance sheet. Policy makers have outlined a plan where the central bank would allow $6 billion of Treasurys and $4 billion of mortgage bonds to mature each month without reinvesting the proceeds in new securities. The Fed would then increase the size of its pullback in three-month intervals.

Investors and traders forecast the central bank will shrink its holdings by $1 trillion or more through this process.

While the impact is expected to be modest at first, as it progresses it could become an increasingly potent brake on credit creation and economic growth, analysts said.

Write to Daniel Kruger at d aniel.kruger@wsj.com

(END) Dow Jones Newswires

September 19, 2017 11:56 ET (15:56 GMT)

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