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NEW YORK: US Treasury yields rose on Wednesday after Federal Reserve Chairman Jerome Powell said a decline in inflation this year could be due to transitory factors, after the US central bank's meeting statement struck a cautious tone on inflation.

Yields initially fell to one-month lows after the Fed's policy statement suggested that a recent decline in inflation may be more persistent than expected, and was no longer to be blamed simply on falling energy prices.

The yields reversed, however, after Powell said that the drop in inflation this year may be transitory. Factors holding it down could include portfolio management, apparel prices and air fares, he added.

"Powell indicates transitory lower inflation," said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee. "He also sounds more bullish on economy than (the) statement."

Two-year note yields rose to 2.30 percent, after initially falling to 2.21 percent on the statement, the lowest since March 28.

Benchmark 10-year note yields gained to 2.51 percent, after initially dropping to 2.46 percent, the lowest since April 1.

The yield curve between two-year and 10-year notes flattened to 21 basis points after initially expanding to 25 basis points, the steepest level since November 28.

The Fed also cut the interest the Fed pays banks on excess reserves to 2.35 percent from 2.40 percent in an effort to ensure its key overnight lending rate, the federal funds rate, remains within the current target band.

Yields fell earlier on Wednesday after data showed that US manufacturing activity slowed to a 2-1/2-year low in April amid a sharp drop in new orders.

The Treasury said on Wednesday that the US government will have to stop borrowing money between July and December if Washington does not agree to raise the debt ceiling.

It also said it plans to sell $84 billion in coupon-bearing supply next week, including $38 billion in three-year notes, $27 billion in 10-year notes and $19 billion in 30-year bonds.

Copyright Reuters, 2019