U.S. Treasury yields dipped in European trading as investors braced for the Federal Reserve's policy meeting, where rates are expected to remain at 3.50%-3.75%. The 10-year Treasury yield fell 1.7 basis points to 4.182%, according to Tradeweb data. The DXY dollar index held steady at 99.545 amid cautious market sentiment.

Market expectations for rate cuts this year have dropped to one from 2.5 before Middle East tensions escalated, driven by oil price spikes. DHF Capital S.A's Bas Kooijman noted that shifting Fed expectations, geopolitical risks, and inflation concerns have fueled caution ahead of Chair Powell's comments. Bond markets showed signs of stabilization ahead of central bank meetings worldwide.

Commerzbank Research's Hauke Siemssen observed that eurozone government bond spreads tightened across the board, led by Italy. While yields may not decouple from energy price dynamics, intraday oil price swings could lose importance if tensions in the Strait of Hormuz ease. The Fed meets Wednesday, followed by the European Central Bank Thursday.