TREASURIES-U.S. yields edge higher ahead of Fed meeting

       * U.S. 2-year note auction shows solid results
    * U.S. 10-year TIPS yield hits record low
    * U.S. 10-year breakeven inflation falls
    * Fed's policy meeting this week in focus

 (Recasts, adds new comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, July 26 (Reuters) - U.S. Treasury yields drifted
higher in choppy trading on Monday, recovering from sharp falls
earlier in the session and tracking shifts in risk appetite,
with investors cautious ahead of the Federal Reserve's monetary
policy meeting this week.
    A solid U.S. two-year note auction earlier added to some
bids in Treasuries, before losing steam.
    "The 2-year auction was met with a reasonable reception and
given the link between 5-year yields and lift-off expectations,
we'll be closely watching Tuesday's Treasury auction for any
indication of a market lean ahead of (Fed Chair Jerome) Powell's
press conference," said BMO Capital Markets rates strategists
Ian Lyngen and Ben Jeffery in a research note.
    The Fed's two-day policy meeting starts on Tuesday,
concluding on Wednesday with a possible policy decision and a
news conference by Powell on Wednesday.
    The Treasury is selling $61 billion in 5-year notes on
Tuesday and $62 billion in 7-year notes on Thursday.
    Earlier in the global session, U.S. yields dropped following
steep losses in Chinese stocks on worries over tighter
regulations in the world's second-largest economy.
    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.

    The U.S. Treasury's auction of $60 billion in 2-year notes,
meanwhile, had 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, a 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 Gennadiy Goldberg,
senior rates strategist at TD Securities in New York.
    In late afternoon trading, the U.S. 10-year Treasury yield
rose to 1.293% from 1.285% late on Friday.
    U.S. 30-year yields were up at 1.941% 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
-1.119%.
    The U.S. 10-year inflation breakeven, the bond market's
gauge of investors' price outlook over the next 10 years, was
down at 2.416% 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,
though analysts expect no change in policy.
    "Given Fed Chair Powell's focus on downside risk in recent
testimony and in the June press conference, we believe the surge
in the Delta variant will combine with the headwinds from supply
shortages and bottlenecks to leave the FOMC firmly on hold,"
Action Economics said in its latest blog.

      July 26 Monday 3:56PM New York / 1956 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.045        0.0456    -0.005
 Six-month bills               0.05         0.0507    0.000
 Two-year note                 99-221/256   0.1961    -0.004
 Three-year note               99-254/256   0.3776    0.003
 Five-year note                100-188/256  0.723     0.006
 Seven-year note               101-106/256  1.0379    0.006
 10-year note                  103-20/256   1.2896    0.005
 20-year bond                  106-120/256  1.858     0.013
 30-year bond                  109-220/256  1.9379    0.014

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap         8.50         0.50
 spread
 U.S. 3-year dollar swap        11.00         0.50
 spread
 U.S. 5-year dollar swap         8.75         0.00
 spread
 U.S. 10-year dollar swap        0.00         0.25
 spread
 U.S. 30-year dollar swap      -27.75        -0.50
 spread


 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan
Oatis, Steve Orlofsky and Dan Grebler)

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