By Sam Goldfarb 

U.S. government-bond prices edged higher Tuesday, as traders responded to swings in stocks and looked ahead to the Federal Reserve's policy decision on Wednesday.

In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 2.843%, according to Tradeweb, compared with 2.857% Monday.

Yields, which fall when bond prices rise, declined overnight as stocks dropped in Asia and Europe to the benefit of safer assets. They perked up near the start of U.S. trading as U.S. stock indexes bounced back from sharp declines Monday but still struggled to climb back to closing levels from a day earlier.

Tuesday's moves followed the pattern of recent sessions, in which trading in Treasurys has largely been dictated by the stock market, as investors await the end of an eagerly-anticipated Fed meeting.

Federal-funds futures, used by investors to bet on the direction of interest rates, showed Tuesday morning a 75% chance that the Fed will raise interest rates for the fourth time this year on Wednesday, roughly unchanged from Monday and a week earlier.

While that shows investors are largely expecting a rate increase, it indicates greater uncertainty than has been the case heading into other meetings this year. Beyond the rate decision, investors have also gamed out a range of scenarios by which the Fed could communicate its plans for next year.

Most are anticipating at least a slowdown in rate increases. In recent months, a series of Fed officials said that benchmark rates are close to a so-called neutral level, in which they would neither slow nor speed up the economy. That has led to speculation that the Fed could stop raising rates and wait for signs of accelerating inflation before moving again.

One challenge for Fed officials could be signaling a shift toward more cautious monetary policy without communicating too much concern about the economic outlook, analysts said.

Gary Pollack, head of fixed-income trading at Deutsche Bank AG's private wealth management unit, said he is looking for Fed Chairman Jerome Powell to say that the interest rates may have already reached a neutral level to give a clear signal that the central bank is no longer going to tighten monetary policy in a predetermined fashion.

That, he said, "would ease a lot of concerns in the marketplace."

Shifting expectations about the outlook for interest rates and inflation have had a large impact on Treasurys in recent months, dragging the 10-year yield down from around 3.25% in early November and shrinking the gap between long and short-term Treasury yields.

The gap between 10-year and two-year yields, known on Wall Street as the 2-10 spread, settled Monday at 0.155 percentage point, down from around 0.3 percentage point in early November.

Investors closely watch the 2-10 spread because the two-year yield has exceeded the 10-year yield before every recession since 1975, a phenomenon known as an inverted yield curve.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

December 18, 2018 11:43 ET (16:43 GMT)