TREASURIES-U.S. yields flat to modestly lower ahead of Fed meeting, Treasury supply

By Gertrude Chavez-Dreyfuss NEW YORK, July 26 (Reuters) - U.S. Treasury yields were little changed to slightly lower in choppy trading on Monday, recovering a bit from sharper falls in the Asian session and tracking shifts in risk appetite, with investors cautious as well ahead of the Federal Reserve's monetary policy meeting this week. 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. The yield curve, which can be a gauge of risk sentiment, was little changed at 107.40 basis points, as measured by the spread between 2-year and 10-year yields. Kim Rupert, managing director for fixed income at Action Economics, said "risk aversion has put a solid bid in bonds during Asian hours," although that has been partly unwound in the New York session. "Weighing heavily was China's announcement of various restrictions on tech shares. The spread of the Delta variant and supply chain bottlenecks are also continuing to add to global growth risks," she added. Chinese blue chips shed 3.2% in the biggest daily decline since March, as the education and property sectors were battered due to concerns of over tighter government rules. In midmorning trading, the U.S. 10-year Treasury yield dipped to 1.277% from 1.285% late on Friday. U.S. 30-year yields were flat at 1.926% from Friday's 1.924%. The yield on 10-year Treasury Inflation-Protected Securities (TIPS) plunged to a record low of -1.12%, as investors bought the instrument as the yield on nominal 10-year Treasuries continue to trade below the expected inflation rate. U.S. 10-year TIPS yield was last at -1.086%. The U.S. 10-year inflation breakeven, the bond market's gauge of investors' price outlook over the next 10 years, was flat at 2.361% 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 $183 billion in notes, including Monday's $60 billion in 2-year notes, $61 billion in 5-year notes on Tuesday, and $62 billion in 7-year notes on Thursday. July 26 Monday 10:20AM New York / 1420 GMT Price Current Net Yield % Change (bps) Three-month bills 0.05 0.0507 0.000 Six-month bills 0.05 0.0507 0.000 Two-year note 99-218/256 0.2022 0.002 Three-year note 99-254/256 0.3776 0.003 Five-year note 100-194/256 0.7181 0.001 Seven-year note 101-120/256 1.0297 -0.002 10-year note 103-48/256 1.2779 -0.007 30-year bond 110-40/256 1.9255 0.002 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.25 0.25 spread U.S. 3-year dollar swap 10.75 0.25 spread U.S. 5-year dollar swap 8.50 -0.25 spread U.S. 10-year dollar swap -0.25 0.00 spread U.S. 30-year dollar swap -27.75 -0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis)