TREASURIES-US yields dip as traders stick with bets on September rate cut

By Matt Tracy

WASHINGTON, Aug 18 (Reuters) - U.S. Treasury yields ticked lower in early trading on Monday as the market strongly held onto bets that the Federal Reserve would cut interest rates next month despite data last week showing stronger-than-expected producer price inflation in July.

The yield on the benchmark U.S. 10-year note US10YT=RR was down 1.6 basis points from Friday's close to 4.312%.

The two-year Treasury's yield US2YT=RR, which typically moves in step with interest rate expectations, barely moved from Friday's close and was last at 3.752%. U.S. two-year yields leaped last Thursday following the release of the producer inflation report, but have since fallen back on renewed rate-cut expectations.

Traders see an 84.2% chance of a 25-basis-point cut to the U.S. central bank's policy rate at its September 16-17 meeting, according to Fed funds futures. The Fed's policy rate has been in the 4.25%-4.50% range since last December.

The most closely-watched event this week will be the Fed's annual Jackson Hole central banking symposium in Wyoming. Some market participants anticipate Fed Chair Jerome Powell will take a hawkish tone in his keynote speech on Friday.

"He may be persuaded to cut by the September 17th meeting, however, I think the yield curve could likely flatten ahead of his speech Friday in anticipation of a more hawkish tone," Tom di Galoma, managing director of rates and trading at Mischler Financial in Park City, Utah, said in a note.

The closely watched gap between yields on two- and 10-year Treasury notes US2US10=TWEB, considered a gauge of growth expectations, was at 56 basis points, barely changed from late Friday.

"My general view of the economy is that it is slowing in a lot of places and job losses will grow ahead of year-end," di Galoma said.

The Treasury Department is scheduled to hold two auctions on Monday, including an $82 billion auction of 13-week bills and a $73 billion auction of 26-week bills.