TREASURIES-US bonds dip as risk appetite rises on hopes of ending government shutdown

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Senate advances bill to end government shutdown

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Fed officials cautious on further rate cuts inflation concerns

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US three-year auction shows strong results

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US yield curve bear flattens

(Adds analyst comment, corporate bond deals, three-year note auction results, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, Nov 10 (Reuters) - U.S. Treasuries slipped on Monday, driving yields higher, as investors cheered news that lawmakers were making progress toward ending the longest federal government shutdown in history - a standoff that has begun to weigh on the world's largest economy.

Corporate bond deals on Monday also weighed on Treasury prices, which move inversely to yields, led by multi-tranche deals from Verizon and Caterpillar (CAT).

Wall Street dealers typically seek to lock in borrowing costs when underwriting corporate bonds. To hedge against interest rate fluctuations, they sell Treasuries ahead of the bond issuance. Once the deal is completed, they unwind the hedge by buying back Treasuries - a process known as exiting the "rate lock."

A strong U.S. three-year note auction, however, briefly spurred some buying of Treasuries, specifically on the short end of the curve, paring the rise in yields.

But volume was generally thin overall ahead of Tuesday's U.S. Veterans Day holiday, with the bond market closed.

The focus remains on the Senate's efforts to end the government closure.

The U.S. Senate on Sunday moved forward on a measure aimed at reopening the government, advancing a House-passed bill that will be amended to fund it until January 30 and include a package of three full-year appropriations bills. But many steps remain before the deal can become law.

Monday marked the 41st day of the federal government shutdown, which has furloughed workers, disrupted food aid and snarled flights due to staffing shortages in air traffic control.

"Investors are acting positively to the potential of the shutdown being behind us soon. So you've seen markets moving up and bond yields heading up as well," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"I would just caution that at some point that's going to subside and then investors will start to scrutinize the economic data as they come out: looking at both the labor market and inflation numbers. That will dictate yield behavior for the rest of this year and into 2026."

In afternoon trading, the benchmark 10-year Treasury yield was up 1.7 basis points at 4.110%, while the two-year yield, which reflects interest rate expectations, rose 3.4 bps to 3.591%.

U.S. 30-year bond yields were little changed at 4.704% .

BEAR FLATTENING CURVE

The yield curve flattened a touch on Monday, as the spread between U.S. two-year and 10-year yields fell to 51.5 bps , from 53.3 bps late Friday.

The curve showed a bear flattening pattern, with short-term yields rising faster than long-term rates, suggesting that investors believed the Fed may have to pause its cutting cycle given higher inflation expectations.

Since the Fed last cut rates on October 29, several U.S. central bank officials have come out and preached caution on cutting rates further.

Fed Chair Jerome Powell had said at the conclusion of that Fed meeting that easing in December was not assured amid policymakers' sharply divided views on the economic outlook and monetary policy.

On Monday, more Fed officials voiced the possibility of a pause in rate cuts at next month's policy meeting.

St. Louis Fed President Alberto Musalem said with inflation closer to 3% than the 2% goal, the economy resilient, financial conditions accommodative and monetary policy close to neutral, the Fed should "tread with caution" on any further rate cuts.

San Francisco Fed President Mary Daly, in an essay on Monday, said the central bank now needs to assess if the U.S. is still at risk of a breakout of inflation and needs to keep policy somewhat tight or is on the verge of a productivity boom driven by artificial intelligence that could fuel growth without a rise in prices.

"The Fed is still very unsure whether or not they're going to do anything in December," said Tom di Galoma, managing director of rates and trading at Mischler Financial in Park City, Utah. "The percentage of a 25 basis-point rate cut is around 68%, which is high, but not high enough."

Also on Monday, the Treasury sold $58 billion in three-year notes to strong demand. The Treasury scheduled the auction earlier than usual due to Tuesday's holiday.

The auction priced at 3.579%, roughly one basis-point lower than the expected rate at the bid deadline, suggesting investors did not need a higher yield to take down the note.

There were $165.3 billion in bids for a robust 2.85 bid-to-cover ratio, another measure of demand, the highest since August 2023. That was higher than the 2.66 level last month and the 2.60 average.

Post-auction, the U.S. three-year yield rose 3.1 bps to 3.597%. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Joe Bavier and Lisa Shumaker)