TREASURIES-U.S. yields sink on growth fears; focus on Fed policy update

       * U.S. 5-year note auction was decent
    * Fed seen holding monetary policy steady
    * U.S. reverse repo volume surges to $927 bln
    * U.S. 10-year TIPS yields hit record low for 2nd day

 (Adds comment, reverse repo volume; updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, July 27 (Reuters) - U.S. Treasury yields tumbled
on Tuesday as risk appetite languished amid lingering concerns
about high inflation and the fast-spreading Delta coronavirus
variant that could thwart global economic growth.
    Investors were also cautious as the Federal Reserve's
two-day monetary policy meeting began on Tuesday. The U.S.
central bank is likely to stand pat on monetary policy but could
discuss plans for tapering asset purchases during its Jackson
Hole, Wyoming, gathering in August, analysts said.
    "One thing about predicting Fed moves is to separate what
you think they will do versus what you think they should do,"
said Scott Skyrm, executive vice president in fixed income and
repo at Curvature Securities in New York.
    "If we are just looking at 'should,' I believe it's time for
the Fed to end QE (quantitative easing) purchases. Reverse repo
volume is now over $900 billion a day. The liquidity the Fed is
providing through QE is just recirculating back to the Fed via
RRP," he added, creating distortions in the Treasury market.
    The Fed's reverse repo window, launched in 2013, is used to
mop up extra cash in the repo market and create a strict floor
under its policy rate, or the effective fed funds rate,
currently in a target range of 0%-0.25%.
    The reverse repo volume soared to $927 billion on Tuesday,
the second largest usage on record. Volume has surged this month
after the Fed in June raised the rate it pays on reverse repos
to 0.05% from 0% as part of technical adjustments to keep the
fed funds rate from falling too low.
    Tuesday's U.S. 5-year note sale, meanwhile, showed decent
results overall, but not as strong as initially expected,
especially with the Treasuries rally going into the auction. The
high yield was 0.710%, slightly below the when-issued or
expected rate of 0.711% at the bid deadline.
    The bid-to-cover ratio, a measure of demand, was 2.36, the
same as last month, but below what analysts said was the 2.40
average.
    The yield on 10-year Treasury Inflation-Protected Securities
(TIPS) plunged to a record low of -1.147% for a
second straight session as investors bought TIPS on concerns
about the prospect of steeper consumer prices going forward. The
yield was last at -1.117%.
    "With the increased uncertainty from China and the Delta
variant, the markets are taking a breather from last week's
reversal on rates and equity prices," said Ellis Phifer,
managing director of fixed income at Raymond James in Memphis,
Tennessee. "Maybe it's the pause that refreshes."
    U.S. 10-year yields were on an uptrend for most of last
week.
    In late afternoon trading, the U.S. 10-year Treasury yield
slid to 1.239% from 1.276% late on Monday.
    U.S. 30-year yields dropped to 1.891% from
Monday's 1.925%.
    Post-auction, U.S. 5-year note yields were down at 0.695%
, from Monday's 0.713%. The U.S. 5-year note has come
to reflect market views on Fed monetary policy.

      July 27 Tuesday 3:36PM New York / 1936 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.05         0.0507    0.000
 Six-month bills               0.05         0.0507    -0.002
 Two-year note                 99-215/256   0.2055    -0.010
 Three-year note               100-10/256   0.3617    -0.013
 Five-year note                100-224/256  0.6939    -0.019
 Seven-year note               101-180/256  0.9948    -0.030
 10-year note                  103-144/256  1.2378    -0.038
 20-year bond                  107-80/256   1.8089    -0.035
 30-year bond                  111          1.8904    -0.035

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap         6.75        -1.75
 spread
 U.S. 3-year dollar swap        10.75        -0.25
 spread
 U.S. 5-year dollar swap         8.75         0.00
 spread
 U.S. 10-year dollar swap        0.00         0.00
 spread
 U.S. 30-year dollar swap      -27.50         0.00
 spread

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

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