U.S. yields slightly down after solid 2-year note auction, ahead of Fed

NEW YORK: U.S. Treasury yields slipped in choppy trading on Monday, recovering a bit from sharper falls in the Asian session and tracking shifts in risk appetite, with investors cautious ahead of the Federal Reserve's monetary policy meeting this week.

A solid two-year note auction added to some bids in Treasuries, analysts said.

"There are some residual concerns about COVID, about U.S.-China relations. And so that drove yields much lower in the morning," said Gennadiy Goldberg, senior rates strategist at TD Securities in New York.

"It didn't seem to last. But volume is relatively thin in summer markets."

Earlier in the session, U.S. yields dropped following steep losses in Chinese stocks on worries over tighter regulations in the world's second largest economy.

US Treasury yields slip to 11-day low as growth fears bite

Chinese blue chips shed 3.2% in the biggest daily decline since March, as the education and property sectors were battered due to concerns over tighter government rules.

Also on Monday, the U.S. Treasury auctioned $60 billion in 2-year notes, with solid results.

The yield was 0.213%, compared with the when-issued or expected rate of 0.217% at the bid deadline, suggesting investors were willing to receive a slightly lower yield for the note.

The bid-to-cover ratio, another gauge of demand, was 2.47, below both last month's 2.54 and the 2.53 average.

"You rarely see a 2-year auction struggle for demand just because their rates have been stable," said TD's Goldberg.

"You tend to see the same buyers show up in the two-year note auction. Because rates have been steady the last few months, when one needs a two-year note, they will just buy it." In early afternoon trading, the U.S. 10-year Treasury yield dipped to 1.272% from 1.285% late on Friday.

U.S. 30-year yields were slightly lower at 1.922% from Friday's 1.924%.

Post-auction, U.S. 2-year note yields were down at 0.196%, compared with 0.2% last Friday.

The yield on 10-year Treasury Inflation-Protected Securities (TIPS) plunged to a record low of -1.12% on Monday, as investors bought the instrument with the yield on nominal 10-year Treasuries continuing to trade below the expected inflation rate. U.S. 10-year TIPS yield was last at -1.117%.

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The U.S. 10-year inflation breakeven, the bond market's gauge of investors' price outlook over the next 10 years, was down at 2.391% from Friday's 2.44%. In mid-May, 10-year breakeven inflation hit 2.564%, the highest since March 2013.

Investors are also focused on this week's Fed meeting. The U.S. central bank meets on Tuesday and Wednesday and, while no change in policy is expected, market participants will look to Fed Chairman Jerome Powell to clarify what substantial further progress on employment would look like.

Treasury supply is also in the spotlight this week. The Treasury is selling $61 billion in 5-year notes on Tuesday and $62 billion in 7-year notes on Thursday.