(Updates prices)
By Karen Brettell
NEW YORK, Oct 31 (Reuters) - Longer-dated U.S. Treasury yields rose on Wednesday, ahead of a closely-watched Federal Reserve decision at the conclusion of its two-day policy meeting, where it is expected to keep interest rates steady.
Benchmark 10-year notes rose 6 basis points to 4.9350% and last settled at 4.9264%, having last week hit 16-year highs as investors adjust for the likelihood that the U.S. central bank will hold rates higher for longer and on concerns about increasing U.S. Treasury supply.
The 10-year yield had risen to 5.021% on Oct. 23, its highest since 2007.
The Fed is also seen as unlikely to raise rates further unless inflation shows signs of reaccelerating.
“As we get closer to the Fed, I think rates are anticipating sort of a dovish announcement. It seems to me that the Fed is done for the year, if not done for this cycle,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York.
Traders are pricing in a roughly 25% chance of an increase in December and a 36% chance of a hike by January, according to the CME Group's FedWatch Tool.
Investors will also focus on any comments by Fed Chairman Jerome Powell about the impact of higher Treasury yields on the economy, and to what degree this may affect Fed policy.
Two-year note yields last stood at 5.0811%, having fallen from their Oct. 19 peak of 5.259%, the highest since 2006.
The inversion in the yield curve between the two-year and 10-year notes deepened to minus 15.8 basis points. It reached minus 11 basis points on Oct. 23, the smallest inversion since July 2022.
Traders are watching for this part of the curve to turn positive, as is common before a recession sets in.
That said, typically the curve steepening occurs as a result of shorter-dated yields falling faster than longer-dated ones as investors price in Fed rate cuts. This time the move is being led by yield increases in the long-end, which makes it more difficult to interpret.
The Treasury on Wednesday will give details on its debt funding strategy and is expected to increase auction sizes for bills, notes and bonds.
Longer-dated yields came off their lows after data on Tuesday showed that U.S. labor costs increased solidly in the third quarter amid strong wage growth.
Other data showed that U.S. annual home price growth accelerated for a third straight month in August.
Friday’s jobs report for October is this week’s main U.S. economic focus, and is expected to show that employers added 180,000 jobs in the month.
(Reporting by Karen Brettell; editing by Jonathan Oatis, Marguerita Choy and Shri Navaratnam)