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TREASURIES-U.S. yields fall as Fed stands pat on policy, notes slowing economy

    * Fed leaves rates unchanged, bond-buying plan intact
    * Fed's Powell says long way away from tapering bond buys
    * 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's Powell remarks, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Jan 27 (Reuters) - U.S. Treasury yields fell 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.
    In his press briefing after the statement, Fed Chairman
Jerome Powell balanced his downbeat near-term assessment of the
economy with optimism about a likely recovery in the second half
of the year as vaccines become more widely distributed.
    Powell said while the U.S. economy is still a long way away
from a full recovery, he noted that there is good evidence to
support expectations of stronger growth in the back half of
2021.
    "The market is digesting Powell's comments and he just
reiterated the Fed's dovish stance," said Andy Richman, senior
portfolio manager at Sterling Capital Management.
    "But rates have come down from the highs on the 10-year and
we're bumping up against the 1% mark. Given how much sell-off
we're seeing in equities today, Treasuries are not rallying that
much here." 
    Richman added that this goes back to whether investors think
in the long term yields would go higher once the vaccine
rollouts go widely.
    The Fed on Wednesday pledged again to keep its support for
the U.S. economy, until there is a full rebound from the
pandemic-triggered recession. Powell, in his briefing, also said
the Fed is not tapering its bond purchases anytime soon.
    Yields across the curve dropped to three-week lows earlier
in the session. 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.
    In late afternoon trading, the U.S. benchmark 10-year yield
 fell to 1.011%, from 1.04% late on Tuesday. It
earlier fell to 1.001%, its lowest since Jan. 6.
    U.S. 30-year yields dropped to 1.771% from
Tuesday's 1.802%, after earlier sliding to a three-week low of
1.761%.
    At the front end, U.S. two-year yields were down at 0.119%
, hitting a three-week low of 0.115% earlier.
    Bond investors are also looking at the stock market, in
which small companies such as GameStop with the largest
bearish bets against them have risen 60% on average so far this
year, outperforming the rest of the market. 
    "It just becomes potentially endemic and it's like a virus,"
said Ellis Phifer, market strategist, at Raymond James in
Memphis, Tennessee. 
    "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 the rally in
breakeven rates are overdone and they are due for a pullback.
    
      January 27 Wednesday 4:16PM New York / 2116 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 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                99-214/256   0.4082    -0.019
 Seven-year note               99-120/256   0.7037    -0.023
 10-year note                  98-192/256   1.0093    -0.031
 20-year bond                  96-156/256   1.575     -0.032
 30-year bond                  96-184/256   1.7671    -0.035
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         7.25         0.00    
 spread                                               
 U.S. 3-year dollar swap         7.75         0.00    
 spread                                               
 U.S. 5-year dollar swap         8.75        -1.00    
 spread                                               
 U.S. 10-year dollar swap        3.50         0.25    
 spread                                               
 U.S. 30-year dollar swap      -24.75         0.00    
 spread (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by
Sinead Carew; Editing by Kirsten Donovan, Steve Orlofsky and
Andrea Ricci)
  
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