TREASURIES-US yields advance as Fed rate-cut bets ease before Powell's remarks

By Matt Tracy

WASHINGTON, Aug 21 (Reuters) - Yields on U.S. Treasuries rose on Thursday as market participants pared back bets on a Federal Reserve interest rate cut next month after mixed data and geared up for widely anticipated remarks by U.S. central bank chief Jerome Powell.

The benchmark U.S. 10-year note yield US10YT=RR rose 3.4 basis points from late Wednesday to 4.329%.

The two-year note yield US2YT=RR, which typically moves in step with interest rate expectations, was last up 4.8 bps at 3.792%.

Treasury yields briefly slipped Wednesday afternoon after the minutes of the Fed's July 29-30 meeting showed that the two policymakers who dissented against the central bank's decision to leave interest rates unchanged last month appeared not to have been joined by their colleagues.

Investors are now looking to the annual Jackson Hole economic symposium in Wyoming, which kicked off on Thursday. The highlight will be Powell's speech on Friday, with investors expecting a signal on the Fed's near-term rates outlook.

"We expect this year's Jackson Hole meeting to offer an opportunity for Powell to again nod towards monetary easing," Andrzej Skiba, head of the BlueBay U.S. fixed income team at RBC Global Asset Management, said in an emailed statement.

"While there are some hot spots in this month's inflation reading, it's probably not enough to deter the doves on the committee," he said, referring to the central bank's policy-setting Federal Open Market Committee

Fed funds futures, which are tied to the U.S. central bank's monetary policy, have priced in a 74% chance of a rate cut at the September 16-17 meeting, according to the CME Group's FedWatch tool. That figure compares with 82% on Wednesday and 92% a week ago.

The market is betting on about 48 bps of easing this year and a total of 123 bps in rate cuts by the end of 2026, LSEG calculations show.

The decline in the probability of rate cuts has helped boost yields overall.

Higher yields were in place on Thursday despite data showing weakness in the U.S. economy. The Labor Department reported that the number of Americans filing for new jobless claims rose by 11,000 in the latest week, the biggest increase since late May.

The Philadelphia Fed's manufacturing survey, a gauge of manufacturing activity in the U.S. Mid-Atlantic region, was also weak in August.

A separate report, however, showed that sales of existing U.S. homes unexpectedly ticked higher in July, though the pace remained sluggish due to high house prices and mortgage rates.

"Overall, it was a disappointing round of data that has contributed to a modest firming in Treasuries, although the implications for the near-term monetary policy outlook are limited," Vail Hartman, an analyst on the U.S. rates strategy team at BMO Capital Markets, said in a written note.

SOFT AUCTIONS

In other sectors of the bond market, the closely watched gap between yields on two- and 10-year Treasury notes US2US10=TWEB, considered a gauge of growth expectations, was at 53.8 bps, just shy of the 55 bps on Wednesday. The curve has steepened recently as the market expects the Fed to resume its rate cutting cycle next month.

The U.S. Treasury held auctions for $100 billion in four-week and $85 billion in eight-week bills on Thursday, which were both soft, pricing higher-than-market expectations.

The sale of $8 billion in 30-year Treasury Inflation-Protected Securities (TIPS), however, saw strong demand with a 2.78 bid-to-cover ratio, which was higher than the last offering and the average of the last six auctions. The bond priced at 2.65%, lower than rate forecasts at the bid deadline.

"While it's been a bearish period of late in the 30-year TIPS space, we suspect that the elevated upside risk to inflation has provided a solid fundamental case for inflation protection at a moment when 30-year real rates are trading above 2.60%," BMO's Hartman noted.

The Treasury Department also announced auctions next week for $69 billion in two-year notes, $28 billion in two-year TIPS, $70 billion in five-year notes, and $44 billion in seven-year notes.