TREASURIES-U.S. yields fall as Fed keeps policy unchanged, notes slowing economy

* Fed leaves rates unchanged, bond-buying plan intact * U.S. yield curve flattens * U.S. yields fall to three-week lows * Bonds look to small sector of stock market * (Adds new comment, Fed policy announcement) By Gertrude Chavez-Dreyfuss NEW YORK, Jan 27 (Reuters) - U.S. Treasury yields remained lower overall on Wednesday, after the Federal Reserve left interest rates unchanged and kept its bond-buying program intact, as widely expected, noting that the economic recovery has slowed in recent months. Yields ticked higher immediately after the Fed statement, but went back down. The Fed pledged again to keep up its support for the U.S. economy, until there is a full rebound from the pandemic-triggered recession. Yields across the curve moved in tandem, dropping to three-week lows. That flattened the yield curve, an indicator of risk appetite, with the spread between two-year and 10-year notes hitting 88.40 basis points, the narrowest gap in three weeks. "(The Fed) did sound a little bit more downbeat, a little bit more concerned about the pace of the recovery and the pace of progress on vaccinations as well, which they've included for the first time in the statement. They're saying it continues to weigh on the recovery," said Gennadiy Goldberg, senior rates strategist, at TD Securities in New York. "I think it's meant to convey that they still realize there's still quite a bit of weakness and that we've a long way to go before the recovery really takes off," he added. In early afternoon trading, the U.S. benchmark 10-year yield fell to 1.009%, from 1.04% late on Tuesday. It earlier fell to 1.001%, its lowest since Jan. 6. U.S. 30-year yields dropped to 1.776% from Tuesday's 1.802%, after earlier sliding to a three-week low of 1.761%. At the front end of the curve, U.S. two-year yields were down at 0.119%, hitting a three-week low of 0.115% earlier in the session. "We don't expect the Fed to begin tapering its asset purchases until early next year and think the first rate hike could be delayed until 2024,"said Paul Ashworth, chief U.S. economist, at Capital Economics. Bond investors are also looking at the stock market, in which small companies with the largest bearish bets against them have risen 60% on average so far this year, outperforming the rest of the market. Shares of GameStop and AMC Entertainment Holdings each more than doubled on Wednesday, forcing hedge funds to take heavy losses as they unloaded short positions. "People are looking at bonds as a safe haven. It all harkens back to the short-seller market and the short-covering rally," said Ellis Phifer, market strategist, at Raymond James in Memphis, Tennessee. "It just becomes potentially endemic and it's like a virus. If it continues to spread, you get more margin calls, more firms having to potentially shut down and they're leveraged so they start selling more and you can end up in a bad spot." The break-even inflation rate on 10-year TIPS, meanwhile, which measures expected annual inflation over the next decade, dropped below 2% for the first time since late December. It was last at 1.989%, down from Tuesday's 2.004%. Analysts have been touting for weeks that breakeven rates are stretched in terms of valuation and are due for a pullback. January 27 Wednesday 2:41PM New York / 1941 GMT Price Current Net Yield % Change (bps) Three-month bills 0.07 0.071 -0.008 Six-month bills 0.08 0.0811 -0.003 Two-year note 100-3/256 0.1191 -0.006 Three-year note 99-216/256 0.1779 -0.005 Five-year note 99-218/256 0.405 -0.022 Seven-year note 99-120/256 0.7037 -0.023 10-year note 98-192/256 1.0093 -0.031 20-year bond 96-148/256 1.5769 -0.030 30-year bond 96-152/256 1.7726 -0.029 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.50 0.25 spread U.S. 3-year dollar swap 7.75 0.00 spread U.S. 5-year dollar swap 9.25 -0.50 spread U.S. 10-year dollar swap 3.50 0.25 spread U.S. 30-year dollar swap -25.00 -0.25 spread (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Sinead Carew; Editing by Kirsten Donovan, Steve Orlofsky and Andrea Ricci)