Updates prices, auction results, adds analyst quotes

By Tatiana Bautzer

NEW YORK, June 16 (Reuters) - Yields on U.S. Treasuries fell on Tuesday, as oil prices reached a three-month low with optimism about the deal between the U.S. and Iran and investors waited for Wednesday's Fed meeting.

The 10-year Treasury note US10YT=TWEB was last down 4.5 basis points at 4.424%. The $13 billion, 20-year note auction was successful, and 20-year yields that peaked at 4.938% during the trading day were at 4.93%.

The Fed is widely expected to keep interest rates steady on Wednesday, and to remove its reference to an easing bias. Markets will focus on the language in its policy statement, the release of updated policymaker projections and what Kevin Warsh, an appointee of President Donald Trump who took over from former Fed chief Jerome Powell last month, says in his post-meeting press conference.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 1.7 basis points to 4.047%.

Analysts believe that even if the Strait of Hormuz is reopened in the short term and the price of oil drops to pre-war levels, it would not likely be enough to contain widespread inflation pressures.

U.S. import prices rose 1.9% in May, above the 1% forecast by economists in a Reuters poll. The index was up 6.7% on a year-over-year basis, the largest rise since August 2022. BMO analysts said in a report on Tuesday that the rise in import prices should add to upward pressure on the Personal Consumption Expenditures Price Index excluding food and energy items in May.

"Inflation pressures have broadened beyond the pass-through of oil prices," said Guneet Dhingra, head of U.S. Rates Strategy at BNP Paribas. "Even if the oil falls to pre-war levels, we do not expect interest rates to follow."

There were also renewed signs of some weakness in the U.S. housing market, with housing starts plummeting 15.4% in May, the largest decline since March 2024.

Markets will be focused on what Warsh will say in the press conference and how the communication will change. Warsh has publicly said he believes the Fed should not give forward guidance.

"That has the potential to create volatility," Dhingra said.

BNP expects the Fed to begin tightening rates by the end of the year, and its analysts believe the neutral interest rate now is higher. The 10-year TIPS breakeven rate, which subtracts the TIPS yield from the nominal Treasury yield and is viewed as a proxy for inflation expectations, was last at 2.299%, indicating the market sees inflation averaging about 2.3% a year for the next decade.