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

By Matt Tracy

WASHINGTON, Aug 18 (Reuters) - U.S. Treasury yields ticked up slightly on Monday as investors 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.

Yields inched higher after dipping earlier, following the National Association of Home Builders' release of August data showing U.S. homebuilder sentiment dropped to its lowest level since late 2022.

The yield on the benchmark U.S. 10-year note US10YT=RR was up 0.9 basis points from Friday's close to 4.337%.

The two-year Treasury's yield US2YT=RR, which typically moves in step with interest rate expectations, inched up 1.2 bps from Friday's close and was last at 3.771%. U.S. two-year yields leaped last Thursday following the release of the producer inflation report, but have since fallen on renewed rate-cut expectations.

"Treasury volatility is remarkably subdued of late," said James Camp, managing director of strategic income at St. Petersburg, Florida-based Eagle Asset Management.

"A few cuts on the short end may help housing if adjustable mortgage products follow in kind," Camp later added on Monday's homebuilder report.

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 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.

Rates are likely rangebound over the next few trading sessions, said Lawrence Gillum, chief fixed income strategist at LPL Financial in Fort Mill, South Carolina.

"That said, ongoing concerns about the U.S. fiscal situation and elevated Treasury issuance tend to be the primary catalyst for marginally higher yields absent economic data," Gillum added.

The closely watched gap between yields on two- and 10-year Treasury notes US2US10=TWEB, considered a gauge of growth expectations, last stood at 56.8 bps versus 56 bps late Friday. It earlier reached its steepest since mid-July at 57.8 basis points.

Investors have their eyes this week on a slew of earnings releases from major U.S. retailers - including Home Depot, Target, and Walmart - for any dents in resilient consumer spending.

"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," Tom di Galoma, managing director of rates and trading at Mischler Financial in Park City, Utah, said in a note.

Treasuries appeared to have a muted reaction to Monday's meeting between U.S. President Donald Trump and Ukrainian President Volodymyr Zelenskiy, where Trump agreed to provide security to Ukraine as part of any deal to end Russia's war in Ukraine. The meeting followed Trump's Friday meeting with Russian President Vladimir Putin.

The Treasury Department held two auctions on Monday. An auction for $82 billion in 13-week bills was 2.7 times oversubscribed with an investment rate of 4.232%. Another auction for $73 billion in 26-week bills was nearly three times oversubscribed with an investment rate of 4.081%.