TREASURIES-US yield curve steepens for 2nd day as inflation view rises; Fed in focus

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 28 (Reuters) - The U.S. Treasury yield curve steepened for a second straight session on Wednesday, driven largely by a weaker dollar and firmer crude prices, both of which have boosted inflation expectations.

Investors are also awaiting fresh guidance from the Federal Reserve on its near-term rate outlook as policymakers conclude their two-day meeting. The Federal Open Market Committee is widely expected to keep rates unchanged after three consecutive cuts in prior meetings.

The move in the yield curve suggests that investors are demanding higher compensation to hold longer-dated maturities as they reassess the risk of renewed inflation.

The spread between two-year and 10-year yields steepened to as much as 67.6 basis points, compared with 66.6 bps late on Tuesday. The curve exhibited a classic bear-steepening pattern, with long-term yields climbing more rapidly than short-term rates as investors priced in a heightened risk of reaccelerating inflation.

"If you look at periods of weak dollar, typically what you see is that the long end is more concerned about inflation risks. So typically, these two things - the dollar and Treasuries - tend to be pressure release valves for the combination of monetary and fiscal policy," said Guneet Dhingra, head of U.S. rates strategy at BNP Paribas, in New York.

"And if the combination of fiscal and monetary policy is suggesting that the dollar is going to weaken, then I think long-end going up is sort of the appropriate textbook response."

The dollar regained its poise on Wednesday after dropping to a four-year low, after U.S. Treasury Secretary Scott Bessent reaffirmed the U.S.'s strong-dollar policy. It was already higher before Bessent spoke as investors cashed in gains on being short the U.S. currency.

The dollar index has declined nearly 2% since the beginning of January, after sinking more than 9% in 2025. U.S. crude futures also advanced on Wednesday, up 1% at 62.96 per barrel CLc1.

On Tuesday, President Trump said the value of the dollar was "great", when asked whether he thought it had declined too much. Traders took his remarks as a green light to sell the dollar further.

Against that backdrop, the market is also focused on the Fed later on Wednesday. Investors will scrutinize the FOMC statement for signals on how policymakers interpret the recent uptick in inflation drivers, the durability of growth, and the trajectory for further policy easing.

U.S. rate futures on Wednesday priced in about 46 bps of easing, or fewer than two 25-basis-point rate cuts, for 2026. That was down from about 53 bps two weeks ago.

"We think that given the uncertainty around inflation and given that we are very close to the neutral rate, or the range of estimates of neutral rate, there is no need for the Fed to start easing aggressively," said Antonina Tarassiouk, director of international economic analysis at Reams Asset Management.

"So we actually think the Fed will be very cautious in terms of cuts going into 2026."

In late morning trading, the benchmark U.S. 10-year yield US10YT=RR rose 2.8 bps to 4.251%, while 30-year yields also gained 2.9 bps to 4.864% US30YT=RR.

On the front end of the curve, the U.S. two-year yield, which reflects interest rate expectations, was up 1 bp at 3.579% US2YT=RR.