TREASURIES-US yields lower after Empire State data with Fed in focus

By Chuck Mikolajczak

NEW YORK, Sept 15 - U.S. Treasury yields declined on Monday, after a gauge of manufacturing activity in New York was below expectations as investors prepared for the upcoming policy announcement from the Federal Reserve later this week.

The New York Fed's Empire State index came in at a negative 8.7 for September, its first reading below zero since June and short of the 5.0 estimate of economists polled by Reuters.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB fell 2.6 basis points to 4.034% and was on track for its third decline in four sessions.

Yields have fallen in recent weeks as a spate of economic data that indicated a softening of the labor market boosted expectations the Fed will be more aggressive in cutting interest rates.

"What you might be looking at in this case is a situation of buy the rumor, sell the facts," said Scott Welch, chief investment officer at Certuity in Potomac, Maryland.

"In other words, people have been positioning their portfolios and yields have dropped accordingly in anticipation of a rate cut. So once it's announced if it's what everybody expected ... I would be surprised if the long end of the curve continued to fall and I would not be surprised if in fact the long end of the curve began to come back up because of inflation fears."

The yield on the 30-year bond US30YT=TWEB shed 2.6 basis points to 4.653%.

The market is fully pricing in a cut of at least 25 basis points at the conclusion of its meeting on Wednesday, with a 4% chance for an outsized 50 basis point cut, according to CME's FedWatch Tool.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 49.7 basis points.

President Donald Trump has been critical of Fed Chair Jerome Powell for not cutting rates more aggressively, while also attempting to fire Governor Lisa Cook. In addition, the Senate will hold a vote later on Monday for Trump's board nominee Stephen Miran.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, declined 2.3 basis points to 3.535%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.439% after closing at 2.446% on Friday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.366%, indicating the market sees inflation averaging about 2.4% a year for the next decade.