TREASURIES-U.S. yields fall as Fed keeps policy unchanged, notes slowing economy

    * Fed leaves rates unchanged, bond-buying plan intact
    * U.S. yield curve flattens
    * U.S. yields fall to three-week lows
    * Bonds look to small sector of stock market

 (Adds new comment, Fed policy announcement)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Jan 27 (Reuters) - U.S. Treasury yields remained
lower overall on Wednesday, after the Federal Reserve left
interest rates unchanged and kept its bond-buying program
intact, as widely expected, noting that the economic recovery
has slowed in recent months.
    Yields ticked higher immediately after the Fed statement,
but went back down.
    The Fed pledged again to keep up its support for the U.S.
economy, until there is a full rebound from the
pandemic-triggered recession.
    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.
     "(The Fed) did sound a little bit more downbeat, a little
bit more concerned about the pace of the recovery and the pace
of progress on vaccinations as well, which they've included for
the first time in the statement. They're saying it continues to
weigh on the recovery," said Gennadiy Goldberg, senior rates
strategist, at TD Securities in New York.
    "I think it's meant to convey that they still realize
there's still quite a bit of weakness and that we've a long way
to go before the recovery really takes off," he added.
    In early afternoon 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 1.776% 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 0.119%, hitting a three-week low of 0.115%
earlier in the session.
    "We don't expect the Fed to begin tapering its asset
purchases until early next year and think the first rate hike
could be delayed until 2024,"said Paul Ashworth, chief U.S.
economist, at Capital Economics.
    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, 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 positions.

    "People are looking at bonds as a safe haven. It all harkens
back to the short-seller market and the short-covering rally,"
said Ellis Phifer, market strategist, at Raymond James in
Memphis, Tennessee.
    "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." 
   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 1.989%, 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 2:41PM New York / 1941 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.07         0.071     -0.008
 Six-month bills               0.08         0.0811    -0.003
 Two-year note                 100-3/256    0.1191    -0.006
 Three-year note               99-216/256   0.1779    -0.005
 Five-year note                99-218/256   0.405     -0.022
 Seven-year note               99-120/256   0.7037    -0.023
 10-year note                  98-192/256   1.0093    -0.031
 20-year bond                  96-148/256   1.5769    -0.030
 30-year bond                  96-152/256   1.7726    -0.029
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         7.50         0.25    
 U.S. 3-year dollar swap         7.75         0.00    
 U.S. 5-year dollar swap         9.25        -0.50    
 U.S. 10-year dollar swap        3.50         0.25    
 U.S. 30-year dollar swap      -25.00        -0.25    
 spread (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by
Sinead Carew; Editing by Kirsten Donovan,  Steve Orlofsky and
Andrea Ricci)