TREASURIES-U.S. yields sink ahead of Fed; investors wary of stock sell-off

    * U.S. yield curve flattens
    * U.S. yields fall to three-week lows
    * Bonds look to small sector of stock market
    * Fed policy announcement due, but little fireworks seen

 (Adds new comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Jan 27 (Reuters) - U.S. Treasury yields slumped on
Wednesday, in line with weaker stocks, as risk appetite hit a
wall ahead of the Federal Reserve's policy announcement as
global economic worries grew amid surging virus cases and
challenges to vaccine rollouts.
    The Fed announcement though is not expected to shake the
market, as the U.S. central bank is likely to keep its
ultra-accommodative policy as the economy battles the pandemic,
analysts said. 
    But investors would want to see the Fed's economic outlook
given the new administration in Washington and the possibility
of strong fiscal measures. 
    "The Fed is not going to signal anything hawkish. I think
they're gun-shy," said Ellis Phifer, market strategist, at
Raymond James in Memphis, Tennessee.
    Bond investors are also looking at the stock market, in
which small companies with the largest bearish bets against them
have risen 60% on average so far this year, easily outperforming
the rest of the market.
    Shares of GameStop and AMC Entertainment Holdings
 each more than doubled on Wednesday, forcing hedge funds
to take heavy losses as they unloaded short
    "People are looking at bonds as a safe haven. It all harkens
back to the short-seller market and the short-covering rally,"
Phifer said.
    "It just becomes potentially endemic and it's like a virus.
If it continues to spread, you get more margin calls, more firms
having to potentially shut down and they're leveraged so they
start selling more and you can end up in a bad spot." 
    Yields across the curve moved in tandem, dropping to
three-week lows. That flattened the yield curve, an indicator of
risk appetite, with the spread between two-year and 10-year
notes hitting 88.40 basis points, the narrowest
gap in three weeks.
    "There are concerns about the labor market as U.S. payrolls
are coming up soon," said Stan Shipley, fixed income strategist,
at Evercore ISI in New York. "There are concerns about what's
going on in Europe. Their economies are suffering again and the
odds are rising that they may have a double-dip recession.     
    In midday trading, the U.S. benchmark 10-year yield
 fell to 1.009%, from 1.04% late on Tuesday. It
earlier fell to 1.001%, its lowest since Jan. 6.
    U.S. 30-year yields dropped to 1.774% from
Tuesday's 1.802%, after earlier sliding to a three-week low of
    At the front end of the curve, U.S. two-year yields were
down at 0.117%, hitting a three-week low of 0.115%
earlier in the session.
   The break-even inflation rate on 10-year TIPS,
meanwhile, which measures expected annual inflation over the
next decade, dropped below 2% for the first time since late
December. It was last at 1.987%, down from Tuesday's 2.004%.
    Analysts have been touting for weeks that breakeven rates
are stretched in terms of valuation and are due for a pullback.
      January 27 Wednesday 12:10 PM New York / 1710 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.075        0.0761    -0.003
 Six-month bills               0.08         0.0811    -0.003
 Two-year note                 100-4/256    0.1172    -0.008
 Three-year note               99-220/256   0.1726    -0.010
 Five-year note                99-218/256   0.405     -0.022
 Seven-year note               99-120/256   0.7037    -0.023
 10-year note                  98-188/256   1.011     -0.029
 20-year bond                  96-140/256   1.5788    -0.028
 30-year bond                  96-136/256   1.7754    -0.027
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         7.50         0.25    
 U.S. 3-year dollar swap         8.25         0.50    
 U.S. 5-year dollar swap         9.00        -0.75    
 U.S. 10-year dollar swap        3.50         0.25    
 U.S. 30-year dollar swap      -25.25        -0.50    
 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Kirsten