TREASURIES-Yields rise, curve steepens, as bond market girds for Fed cut

By Alden Bentley

NEW YORK, Sept 12 (Reuters) - The U.S. Treasury yield curve steepened a bit on Friday as the 10-year yield rose after the previous session's level fell below 4% for the first time since April, as investors digested weak data that opens the door next week to the first easing in nine months.

The rise in the yield on the benchmark 10-year note US10YT=TWEB was pared slightly after the midmorning release of the University of Michigan's preliminary September sentiment index, which came in at 55.4, the lowest since May and below August's 58.2 and economists' average expectation of 58.0.

It was last up 5.1 basis points to 4.062%.

"You saw 10-years kind of hover around the 4% mark. I think some of the move today might just be a little bit of backing up from kind of overstating the move that we saw earlier this week," said Molly Brooks, rate strategist at TD Securities in New York.

The Federal Open Market Committee meets on Tuesday and Wednesday to consider clear signs in recent weeks of a weakening labor market and tame inflation.

The current betting in futures markets has the odds of a 25-basis-point cut on Wednesday at 95%, with a 5% chance of a larger half-point reduction in the fed funds target that has been at 4.25%-4.5% since the last cut in December.

The market is also awaiting the Fed's statement and summary of economic projections, and to hear what Chair Jerome Powell says after the announcement, given the long wait for the impact from tariffs to show up in data that kept the Fed on hold after cutting 100 basis points from September to December.

While Thursday's consumer prices report showed inflation warmed up a bit last month, in contrast with a drop in producer prices reported a day earlier, weekly unemployment claims fit the picture developing since last week's payrolls report of employment deteriorating more than investors or Fed officials had thought just a couple of months ago.

The slice of the yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, which is closely watched as an indicator of economic expectations, was at a positive 50.6 basis points, about three bps steeper than late Thursday.

The yield on the 30-year bond US30YT=TWEB rose 4.4 bps to 4.695%.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, rose 2.5 bps to 3.554%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities US5YTIP=TWEB was last at 2.458% after closing at 2.434% on September 11.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.377%, indicating the market sees inflation averaging about 2.4% a year for the next decade, not far above the Fed's 2% target.