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U.S. jobless claims drop to four-month low

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U.S. existing home sales fall

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U.S. yield curve bear-steepens

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U.S. 10-year TIPS auction shows solid demand

(Adds new comment, bullets, outcome of 10-year TIPS auction)

By Matt Tracy

WASHINGTON, Sept 19 (Reuters) - U.S. Treasury yields

advanced on Thursday, in line with gains in stocks, as

better-than-expected jobless claims data further stoked global

risk appetite, a day after the Federal Reserve announced a jumbo

interest rate cut.

The yield curve, a widely-tracked indicator on the economic

outlook, also rose or steepened, with the spread between the

two-year and 10-year yields hitting 14.3 basis points (bps), the

widest gap since June 2022. It was last at 13.6 bps

, compared with 8.1 bps late on Wednesday.

The curve is also described as a bear steepener, a scenario

in which increases in longer-dated yields are higher than those

on the front end, which suggests market participants are

expecting a pick-up in inflation expectations at some point down

the road.

A steepening curve typically foreshadows more upcoming rate

cuts, which is true in a bull steepener where short-term rates

are falling faster than those on longer maturities. That,

however, is not the case on Thursday.

"The curve steepening is the most obvious trend that's been

in place since the FOMC meeting," said Guy LeBas, chief fixed

income strategist at Janney Capital Management, referring to the

U.S. central bank's policy-setting Federal Open Market

Committee.

"And an aggressive Fed - coupled with the potential for

either reflationary economic growth or a slight uptick in

inflation expectations - are driving the curve steeper."

The benchmark U.S. 10-year Treasury yield hit

its highest level in about two weeks at 3.768% and was last up

5.1 bps at 3.738%. A better-than-expected U.S. jobless claims

report did a lot to boost those yields, with the data showing

the number of Americans filing new applications for unemployment

benefits dropping to a four-month low.

The U.S. 30-year yield also rose to roughly a

two-week high and last traded up 6.4 bps at 4.071%

On the front end of the curve, the two-year yield

was slightly higher on the day at 3.604%. That yield was earlier

pressured by data showing existing home sales fell to their

lowest level since 2023.

The bond market is still experiencing the impact of the

Fed's decision on Wednesday to cut rates by 50 basis points,

which tracked market expectations, but was out of step with the

majority of economists polled by Reuters who anticipated a 25-bp

easing.

In a statement, the FOMC said it had gained greater

confidence that inflation was under control, while Fed Chair

Jerome Powell said in a press conference that the central bank

would decide on the appropriate pace of future rate cuts.

US 10-YEAR TIPS AUCTION

A Treasury auction of $17 billion in 10-year Treasury

Inflation-Protected Securities (TIPS), which

protect against inflation, met with decent demand and a

2.4 times bid-to-cover ratio

on Thursday, slightly higher than the 2.38 seen in the last

auction.

Indirect bidders, a major segment of auction

participants, took down 71.9% of the note, higher than the 68.7%

in the previous sale. More importantly, dealers, who generally

step in when there's low demand, absorbed just 6.6%, the

smallest uptake since January, analysts said.

U.S. 10-year TIPS yield fell after the auction. It was

last flat at 1.565%.

After Wednesday's rate cut decision, market participants

said they were more focused on the Nov. 5 U.S. presidential

election and how its outcome could determine the course of

rates.

"We believe the outcome of upcoming U.S. elections will do

far more to dictate the pace and ultimate magnitude of rate cuts

than any potential policy mistake over a delta of 25 or 50 bps

on the Fed decision," said Andrzej Skiba, head of the BlueBay

U.S. fixed income team at RBC Global Asset Management.

Fed funds futures have priced in about 72 bps of cuts by the

end of this year and 195 bps of cuts by October 2025.

"What's priced in the markets right now is basically an

absurd number of rate cuts predicated on economic weakness,

which may or may not emerge," said LeBas of Janney Capital

Management.

"In the short term, I'm pretty optimistic about the power of

economic growth in the fourth quarter."