TREASURIES-U.S. yields tumble, curve flattens on nagging virus worries

    * U.S. 10-year, 20-year, 30-year yields fall to 3-week lows
    * U.S. two-year note auction shows decent results
    * Investors focus on FOMC meeting next week
    * U.S. coronavirus deaths surge to nearly 420,000

 (Adds new comment, results of U.S. two-year note auction;
updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Jan 25 (Reuters) - U.S. Treasury prices rose,
pushing long-dated yields to three-week lows on Monday, as risk
appetite ebbed amid persistent worries about surging virus cases
and their potential for prolonged lockdowns that could further
weigh on economic growth.
    Drugmaker Merck ending its COVID-19 vaccine program as well
as doubts resurfacing about whether the Biden administration's
proposed $1.9 trillion stimulus plan could push through in
Congress, also weighed on U.S. yields.
    Yields on benchmark 10-year, 20-year, and 30-year securities
 fell to three-week troughs.
    The yield curve also flattened on Monday, in line with the
fall in long bond yields, with the gap between U.S. two-year and
10-year notes dropping to 91.50 basis points, its
narrowest spread in three weeks.
    "There have been more concerns about the resurgence in the
virus: the mutant strains, and the more strict lockdowns are
weighing more on growth than was hoped for previously," said Kim
Rupert, managing director of global fixed income analysis at
Action Economics in San Francisco.
    U.S. coronavirus deaths surged to nearly 420,000 late on
Sunday, with 25 million known cases, according to a Reuters
    Tom di Galoma, managing director at Seaport Global in New
York, also said the rally in Treasuries extended after Merck
pulled out of its COVID vaccine plan. 
    Merck & Co said on Monday it would stop development
of its two COVID-19 vaccines and focus pandemic research on
treatments, with initial data on an experimental oral antiviral
expected by the end of March.
    In early afternoon trading, the U.S. benchmark 10-year yield
 fell to 1.044%, from 1.091% late on Friday. It 
earlier fell to 1.038%, its lowest since Jan. 7.
    U.S. 30-year yields slid to 1.8% from Friday's
1.856%, after earlier dropping to a three-week low of 1.791%.
    U.S. 20-year bond yields also weakened to a three-week
trough and were last down at 1.608%.
    "Technicals have capped the upside in rates," Action's
Rupert said. "Rates have been under pressure for a while, so we
saw long-term rates pop up to their highest level in nearly a
year. So we're still kind of retreating from those levels." 
    On the front end of the curve, U.S. two-year yields were
down slightly at 0.12%, from 0.125% on Friday.
    The break-even inflation rate on 10-year TIPS,
meanwhile, which measures expected annual inflation for the next
10 years, dropped to its lowest since late December. It was last
at 2.015%, down from Friday's 2.017%.
    Also on Monday, the Treasury's $60 billion auction of U.S.
two-year notes showed decent results. The high yield of 0.125%
was below the "when-issued" level or consensus estimate at the
bid deadline.
    The bid-to-cover ratio, a gauge of demand, was solid at 2.67
versus an average of 2.52. Indirect bidders, which include
foreign central banks, took 56.6% of supply, compared with an
average of 50.6%.
    Investors are also on focused on this week's Federal Open
Market Committee meeting.
    "Given the consistent refrain from policymakers of rates at
the effective lower bound and QE (quantitative easing)
continuing at the current pace, there is limited scope for any
hawkish surprise," BMO wrote in Monday's note.
      January 25 Monday 1:28PM New York / 1828 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.075        0.0761    -0.003
 Six-month bills               0.085        0.0862    -0.003
 Two-year note                 100-2/256    0.1209    -0.004
 Three-year note               99-216/256   0.1778    -0.010
 Five-year note                99-210/256   0.4119    -0.022
 Seven-year note               99-72/256    0.7316    -0.032
 10-year note                  98-100/256   1.0482    -0.043
 20-year bond                  95-248/256   1.6136    -0.045
 30-year bond                  95-212/256   1.8066    -0.049
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         7.50         0.00    
 U.S. 3-year dollar swap         8.00         0.25    
 U.S. 5-year dollar swap         9.75         0.50    
 U.S. 10-year dollar swap        2.75         0.75    
 U.S. 30-year dollar swap      -24.00         0.75    
 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Will Dunham
and Andrea Ricci)