US yields dip as investors weigh lower oil versus Fed rate-hike expectations

By Caroline Valetkevitch

NEW YORK, Sept 22 (Reuters) - US Treasury yields eased on Tuesday as investors weighed lower oil prices against expectations for further interest rate hikes from the Federal Reserve.

The two-year US Treasury yield , which typically moves in step with interest rate expectations for the Fed, had earlier hit a two-year high at 4.7879%. It was last down 2.5 basis points at 4.728%.

Oil prices ended lower, with US President Donald Trump telling reporters at the United Nations that US officials had had a "very good" three-hour meeting on Tuesday with the Iranian delegation. Trump also said during a speech to the UN General Assembly that he thought the US would reach a deal with Iran after midterm elections are held in early November.

Oil prices have spiked since the start of the US-Israeli war on Iran, fueling concerns about inflation and higher interest rates.

The Fed last week raised rates for the first time since 2023 to try to control inflation. Traders see a roughly 55% chance of another increase when the US central bank next meets in October, according to CME FedWatch.

Richmond Fed President Tom Barkin said on Tuesday that Fed rate hikes and the threat of more to come could temper business inflation expectations and cool price increases as firms negotiate over coming-year budgets. Boston Fed President Susan Collins wrote on LinkedIn that she supported the US central bank's decision last week to raise rates in the face of risks that future inflation will be above the 2% target.

Benchmark 10-year US yields held below the 5% level after reaching 5.041% last week, the highest since 2007.

"We had a lot of activity last week with the movement in yields and a lot of events to digest," said Jim Barnes, director of fixed income at Bryn Mawr Trust.

"So far this week, there's been more of a pause. Yields seem as if they've hit somewhat of a high, and the market is looking for a catalyst in order to reverse it," he said.

Two-year yields briefly edged higher after the Treasury Department's $69 billion sale of two-year Treasury securities.

Lou Brien, a market strategist at DRW Trading, wrote that the sale was "right on the market," and noted: "The yield at 4.787% is a small fraction higher than the market at the bidding deadline, but the bid cover, 2.63 to 1, is a fraction higher than average."

The bid-to-cover ratio average for the past year was 2.61, according to a note from Deutsche Bank strategists.

Five- and seven-year auctions also are expected this week.

Last week, the Treasury Department saw soft demand for a $19 billion sale of 10-year Treasury Inflation-Protected Securities.

The yield on the benchmark US 10-year Treasury note was down 2.2 basis points at 4.941%. The yield on the 30-year bond was down 1.5 basis points at 5.281%.

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 21.1 basis points.

The breakeven rate on five-year US Treasury Inflation-Protected Securities was last at 2.334% after closing at 2.343% on Monday.

The 10-year TIPS breakeven rate was last at 2.326%, indicating the market sees inflation averaging about 2.3% a year for the next decade.