By: Gertrude Chavez-Dreyfuss and Rodrigo Campos

U.S. Treasury yields were mixed on Wednesday, moving within narrow ranges, as bond investors balanced their positions ahead of another Federal Reserve meeting next week that could signal more hefty rate increases to scupper persistently strong inflation.

A fairly strong U.S. 20-year bond auction contributed to gains on the long end, pushing their yields lower compared with those with shorter-term maturities and keeping the curve inverted.

The inversion reflected concerns that aggressive Fed hikes could tip the world’s largest economy into recession.

The yield of the U.S. two-year note exceeded that of the benchmark 10-year debt by about 21.8 basis points (bps)US2US10=TWEB on Wednesday. The inversion was as deep as 34.4 bps on Monday, the largest inversion since 2000, Refinitiv data showed.

The 2/10 inversion specifically preceded the last eight recessions, analysts said, as they looked cautiously to the Fed’s statement after the July 26-27 policy meeting.

The Fed is widely expected to raise interest rates by another 75 bps.

“I don’t think the Fed is going stop raising rates. If you look at the inflation numbers, they are really high, but they will come down,” said Gregory Faranello, Head of U.S. Rates at AmeriVet Securities in New York.

“If the Fed is committed to a 2% core inflation target, we have a really long way to go. And rates may need to go up much more than what they have been priced for right now,” he added.

In afternoon trading, the benchmark U.S. 10-year yield rose nearly 2 bps to 3.0377% US10YT=RR. For now, analysts see the 10-year peaking around 3.5%. Since hitting an 11-year high of 3.4980% in mid-June, the 10-year yield has declined by 45 bps.

The 10-year yield slipped after data showed U.S. existing home sales fell for a fifth straight month in June to the lowest level in two years.

Sales of previously-owned homes fell 5.4% to a seasonally adjusted annual rate of 5.12 million units last month, the lowest level since June 2020 when sales were rebounding from the COVID-19 lockdown slump.

The U.S. 20-year yield slipped to 3.4301% US20YT=RR, as its price rose, helped a bit by a fairly decent auction.

The 20-year’s high yield stopped at 3.42%, lower than the expected rate at the bid deadline, suggesting that investors were willing to take the note at a lower rate. The bid-to-cover ratio, a measure of demand, was 2.6, the highest since April.

There was record demand from indirect bidders, which include foreign central banks. A sell-off in the 20-year bond may have helped shore up demand for the security, analysts said.

“Bidding stats (for the auction) were quite strong in a vacuum, but the 20-year point continues to struggle on an outright basis,” wrote Tom Simons, money market economist at Jefferies after the auction.

The U.S. two-year yield, which typically moves in step with interest rate expectations, rose 1.7 bps to 3.248% US2YT=RR. The yield on the 30-year Treasury bond US30YT=RR was down 1.8 bps at 3.16%.