Yield curve steeper as stocks rise, Fed meets

Investors drove longer-term US Treasury yields higher on Tuesday, steepening the yield curve, as equity markets rose while the Federal Reserve began a two-day meeting.

The benchmark 10-year yield was a basis point higher at 0.6789% in morning trading.

US stocks opened higher on Tuesday as upbeat data from China revived optimism around an economic rebound, while investors looked for more stimulus from the Fed.

US import prices increased more than expected in August and gains in the prior month were revised sharply higher, supporting the view that inflation pressures were building up.

Michael Lorizio, senior fixed income trader for Manulife Investment Management, said another factor driving longer-term yields higher was likely positioning by traders ahead of a large auction of 20-year bonds by the US Treasury in the early afternoon.

"There's an anticipation that if you need to add some duration, you might be able to add it a bit cheaper later in today's trading," Lorizio said.

The 20-year bond was reintroduced only in May, giving investors less trading data on which to forecast its value.

Oil prices rose, supported by hurricane supply disruptions in the United States, but forecasts of a slower-than-expected recovery in global demand from the pandemic weighed.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 54 basis points, about a basis point higher than its close on Monday and well above its level of 33 basis points reached on July 24.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up less than a basis point at 0.139% in morning trading.