TREASURIES-US yields rise as traders gauge Fed policy, before auctions

By Karen Brettell

Aug 25 (Reuters) - U.S. Treasury yields rose on Monday after Federal Reserve Chair Jerome Powell on Friday indicated that a September rate cut was likely, but not certain, and before the Treasury will sell short- and intermediate-dated debt this week.

Powell said that risks to the job market were rising, but also noted that inflation remained a threat and that a decision was not set in stone.

Traders are mindful that data for August due before the Fed’s September 16-17 meeting could still sway Fed policy.

Fed funds futures traders are pricing in 84% odds of a September cut, according to the CME Group’s FedWatch Tool.

September “seems like the base case right now”, said Jan Nevruzi, U.S. rates strategist at TD Securities in New York. However “if you have a very strong set of releases in the coming weeks then they may push it back a little bit”.

Traders raised bets on a September cut after unexpectedly weak jobs data for July and consumer price inflation that showed limited increases in inflation so far from the U.S. President Donald Trump's tariff policies.

Hotter than expected producer price inflation last month raised some doubts over the certainty of a cut, but going forward the Fed is expected to prioritize the labor market in its policymaking.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, was last up 4.4 basis points on the day at 3.732%.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 2.9 basis points to 4.287%.

The yield curve between two-year and 10-year notes US2US10=TWEB flattened by around one basis point to 56 basis points.

Yields also rose on Monday as traders prepared for auctions this week and in line with global government bond yield increases, with trading likely to be relatively quiet this week before Monday's Labor Day holiday, said Nevruzi.

“It should be just auctions and month-end as we go into Friday,” he said.

The Treasury will sell $69 billion in two-year notes on Tuesday, $70 billion in five-year notes on Wednesday and $44 billion in seven-year notes on Thursday.