TREASURIES-Longer-dated yields dip before Fed rate decision

By Karen Brettell NEW YORK, Oct 31 (Reuters) - Longer-dated U.S. Treasury yields dipped on Tuesday before the Federal Reserve on Wednesday is expected to conclude its two-day meeting by holding interest rates steady. Benchmark 10-year notes last week hit 16-year highs as investors adjust for the likelihood that the U.S. central bank will hold rates higher for longer and on concerns about increasing U.S. Treasury supply. But the Fed is also seen as unlikely to raise rates further unless inflation shows signs of reaccelerating. “As we get closer to the Fed I think rates are anticipating sort of a dovish announcement. It seems to me that the Fed is done for the year, if not done for this cycle,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York. Traders are pricing in a 25% chance of an increase in December and a 36% chance of a hike by January, according to the CME Group's FedWatch Tool. Investors will also focus on any comments by Fed Chairman Jerome Powell about the impact of higher Treasury yields on the economy, and to what degree this may affect Fed policy. Benchmark 10-year note yields were last at 4.867%, down one basis point on the day. They are holding below a 16-year high of 5.021% reached on Oct. 23. Two-year note yields rose four basis points to 5.077%. The inversion in the yield curve between the two-year and 10-year notes deepened to minus 21 basis points. Traders were also relieved after the Treasury Department on Monday said it expects to borrow $76 billion less than previously expected in the fourth quarter, for a total of $776 billion. The announcement garnered more attention that usual after the Treasury in July shocked the market with a $274 billion higher estimate for the third quarter of $1.007 trillion, sparking a selloff in bonds. The Treasury on Wednesday will give details on its debt funding strategy and is expected to increase auction sizes for bills, notes and bonds. Longer-dated yields came off their lows after data on Tuesday showed that U.S. labor costs increased solidly in the third quarter amid strong wage growth. Other data showed that U.S. annual home price growth accelerated for a third straight month in August. Friday’s jobs report for October is this week’s main U.S. economic focus, and is expected to show that employers added 180,000 jobs in the month. October 31 Tuesday 9:30AM New York / 1330 GMT Price Current Net Yield % Change (bps) Three-month bills 5.3275 5.491 0.010 Six-month bills 5.33 5.5689 0.005 Two-year note 99-219/256 5.0769 0.038 Three-year note 99-60/256 4.9057 0.032 Five-year note 100-66/256 4.8163 0.012 Seven-year note 99-248/256 4.8803 0.000 10-year note 92-88/256 4.8668 -0.010 20-year bond 89-192/256 5.2107 -0.017 30-year bond 86-80/256 5.0145 -0.020 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 0.00 0.00 spread U.S. 3-year dollar swap 0.00 0.00 spread U.S. 5-year dollar swap 0.00 0.00 spread U.S. 10-year dollar swap 0.00 0.00 spread U.S. 30-year dollar swap 0.00 0.00 spread (Reporting by Karen Brettell; editing by Jonathan Oatis)