TREASURIES-U.S. yields edge higher ahead of Fed meeting

* U.S. 2-year note auction shows solid results * U.S. 10-year TIPS yield hits record low * U.S. 10-year breakeven inflation falls * Fed's policy meeting this week in focus (Recasts, adds new comment, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, July 26 (Reuters) - U.S. Treasury yields drifted higher in choppy trading on Monday, recovering from sharp falls earlier in the session and tracking shifts in risk appetite, with investors cautious ahead of the Federal Reserve's monetary policy meeting this week. A solid U.S. two-year note auction earlier added to some bids in Treasuries, before losing steam. "The 2-year auction was met with a reasonable reception and given the link between 5-year yields and lift-off expectations, we’ll be closely watching Tuesday's Treasury auction for any indication of a market lean ahead of (Fed Chair Jerome) Powell's press conference," said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery in a research note. The Fed's two-day policy meeting starts on Tuesday, concluding on Wednesday with a possible policy decision and a news conference by Powell on Wednesday. The Treasury is selling $61 billion in 5-year notes on Tuesday and $62 billion in 7-year notes on Thursday. Earlier in the global session, U.S. yields dropped following steep losses in Chinese stocks on worries over tighter regulations in the world's second-largest economy. Chinese blue chips shed 3.2% in the biggest daily decline since March, as the education and property sectors were battered due to concerns over tighter government rules. The U.S. Treasury's auction of $60 billion in 2-year notes, meanwhile, had solid results. The yield was 0.213%, compared with the when-issued or expected rate of 0.217% at the bid deadline, suggesting investors were willing to receive a slightly lower yield for the note. The bid-to-cover ratio, a gauge of demand, was 2.47, below both last month's 2.54 and the 2.53 average. "You rarely see a 2-year auction struggle for demand just because their rates have been stable," said Gennadiy Goldberg, senior rates strategist at TD Securities in New York. In late afternoon trading, the U.S. 10-year Treasury yield rose to 1.293% from 1.285% late on Friday. U.S. 30-year yields were up at 1.941% from Friday's 1.924%. Post-auction, U.S. 2-year note yields were down at 0.196% , compared with 0.2% last Friday. The yield on 10-year Treasury Inflation-Protected Securities (TIPS) plunged to a record low of -1.12% on Monday, as investors bought the instrument with the yield on nominal 10-year Treasuries continuing to trade below the expected inflation rate. U.S. 10-year TIPS yield was last at -1.119%. The U.S. 10-year inflation breakeven, the bond market's gauge of investors' price outlook over the next 10 years, was down at 2.416% from Friday's 2.44%. In mid-May, 10-year breakeven inflation hit 2.564%, the highest since March 2013. Investors are also focused on this week's Fed meeting, though analysts expect no change in policy. "Given Fed Chair Powell's focus on downside risk in recent testimony and in the June press conference, we believe the surge in the Delta variant will combine with the headwinds from supply shortages and bottlenecks to leave the FOMC firmly on hold," Action Economics said in its latest blog. July 26 Monday 3:56PM New York / 1956 GMT Price Current Net Yield % Change (bps) Three-month bills 0.045 0.0456 -0.005 Six-month bills 0.05 0.0507 0.000 Two-year note 99-221/256 0.1961 -0.004 Three-year note 99-254/256 0.3776 0.003 Five-year note 100-188/256 0.723 0.006 Seven-year note 101-106/256 1.0379 0.006 10-year note 103-20/256 1.2896 0.005 20-year bond 106-120/256 1.858 0.013 30-year bond 109-220/256 1.9379 0.014 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.50 0.50 spread U.S. 3-year dollar swap 11.00 0.50 spread U.S. 5-year dollar swap 8.75 0.00 spread U.S. 10-year dollar swap 0.00 0.25 spread U.S. 30-year dollar swap -27.75 -0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis, Steve Orlofsky and Dan Grebler)