Yields fall ahead of Fed meeting, auctions

CHICAGO: Longer-term US Treasury yields tumbled and the yield curve flattened on Monday as the market looked ahead to this week's Federal Reserve meeting and the latest government debt auctions.

Yields rose sharply late last week, lifted by optimism over the US economy and increased debt supply expectations with the enactment of a $1.9 trillion pandemic-related federal fiscal stimulus plan.

The benchmark 10-year yield, which reached 1.642% on Friday, its highest level since February 2020, was last down 3 basis points at 1.6055%.

Federal Reserve policymakers are not likely to detour from monetary policy despite an expected forecast of rapid economic growth in 2021 in the wake of the coronavirus vaccine rollout and the massive stimulus heading to taxpayers and others.

"What we expect is that there is not going to be any change at this point," said Kelly Ye, director of research at IndexIQ, a unit of New York Life Investment Management Holdings.

She added that while the market is pricing in probably three rate hikes in 2023, Fed officials have been saying "they haven't seen any sustainable economic growth and reduction in the unemployment rate yet, so they're going to be very accommodative in the near future."

This week will also bring more supply with a $24 billion, 20-year bond auction on Tuesday and a $13 billion, 10-year Treasury Inflation-Protected Securities auction on Thursday.

Demand will be scrutinized after last week's selloff in US government bonds fueled worries about how high yields could rise without destabilizing the stock market.

The two-year Treasury yield, which typically moves in step with interest rate expectations, was last unchanged at 0.151%.

A closely watched part of the yield curve, which measures the gap between yields on two- and 10-year Treasury notes , flattened by 2.11 basis points to 145.28 basis points, its steepest level since 2015.