TREASURIES-US 10-yield eases with lower oil, European yields

Updates to afternoon

By Caroline Valetkevitch

NEW YORK, Sept 21 (Reuters) - The benchmark US 10-year yield fell on Monday as oil prices dropped and European bond yields also declined, while the two-year Treasury yield hit a more than two-year high.

Oil prices slid as investors hoped for diplomatic progress on the Iran war due to this week's United Nations meeting. Higher oil prices tied to the war have partly been behind concerns about inflation.

Chicago Federal Reserve President Austan Goolsbee said on Monday that US inflation may have moved beyond the tariff and energy price shocks of the last 18 months and is now being driven by strong demand as well, potentially requiring a faster pace of Fed hikes.

The Fed last week raised rates and flagged more hikes in the coming months in an effort to combat persistent inflation.

The yield curve between 2-year and 10-year US notes continued to flatten; 2-year yields are rising faster than 10-year yields as investors price in more rate hikes.

The spread between 2- and 10-year notes US2US10=TWEB was last at 20.2 basis points, after earlier reaching 19.5 bps, the flattest since March 2025.

"Generally the view is that the curve should continue to flatten because the Fed is in a tightening mode," said Tom di Galoma, managing director at Mischler Financial Group.

Traders see a roughly 53% chance of another increase when the US central bank next meets in October, according to CME FedWatch. That expectation was at 55% late Friday.

Di Galoma said US benchmark yields may also be moving lower with European yields.

Euro area benchmark Bund yields dropped. Earlier, the yield on the benchmark German 10-year Bund DE10YT=RR was down 6.78 basis points at 3.454%, from 3.522% late on Friday.

Investors will closely watch upcoming Treasury auctions in order to gauge market demand.

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

On Tuesday, the Treasury will auction $69 billion of two-year Treasury securities, while five- and seven-year auctions also are due this week.

"The market probably does a little bit of selloff on those auctions," Di Galoma said. "I don't think they're going to go all that well. Maybe the two-year is the best."

By afternoon trading, the yield on the benchmark US 10-year Treasury note US10YT=RR was down 4.1 basis points to 4.955%.

The 10-year yield last week reached 5.041%, the highest since 2007.

The two-year US2YT=RR US Treasury yield was up 0.8 basis points at 4.751%. It earlier hit 4.772%, its highest since July 2024.

The yield on the 30-year bond US30YT=RR was down 3.7 basis points at 5.29%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.348% after closing at 2.331% on September 18.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.335%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Caroline Valetkevitch; Editing by Will Dunham and Deepa Babington)

((caroline.valetkevitch@thomsonreuters.com))