TREASURIES-U.S. yields inch up as market in consolidation mode, but downtrend intact

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 22 (Reuters) - U.S. Treasury yields drifted higher on Wednesday after falling for two straight sessions, as the market stayed range-bound with the government shutdown on its 22nd day with no resolution in sight.

President Donald Trump on Tuesday rejected a request by top Democratic lawmakers to meet, until the three-week-old U.S. government shutdown ends. All but three senators in the Democratic caucus are withholding support for a Republican-led stopgap funding bill, unless Trump and enough Republican lawmakers agree to an extension of an enhanced Affordable Care Act tax credit that is due to expire on December 31.

Investors, however, looked to Friday's Consumer Price Index (CPI) report for September, although the outcome is not expected to change the Federal Reserve's mindset to reduce interest rates by a quarter of a percentage point.

In morning trade, the benchmark 10-year yield was up 1.3 basis points (bps) at 3.976% US10YT=RR, while 30-year bond yields were slightly higher at 4.554% US30YT=RR.

On the front end of the curve, U.S. two-year yields, which reflect interest rate expectations, edged up to 3.461% US2YT=RR.

"Treasury yields have been trending lower overall...moreso to do with the economic shutdown because with the shutdown going on, the economic data that we've seen so far has been reflective of a softer economy," said Jim Barnes, director of fixed income at Bryn Mawr Trust, in Berwyn, Pennsylvania.

That should support an interest rate cut by the Fed at a policy meeting later this month.

The Fed is expected to reduce rates two more times this year, with a quarter-percentage-point cut baked in for the October 28-29 meeting, according to LSEG calculations using rate futures. For 2026, the Fed funds futures market has priced in three more 25-basis-point cuts.

The yield curve, meanwhile, steepened a little bit, with the spread between U.S. two-year and 10-year yields at 51.2 bps US2US10=TWEB, from 50.6 bps late on Tuesday. It was a pullback from the flattening trend seen in the last few days.

The curve hit 50 bps in the previous session, the flattest since September 17, suggesting that investors may have lowered their inflation expectations.