TREASURIES-US yields ease on Fed rate cut hopes

WASHINGTON, Oct 7 (Reuters) - Benchmark U.S. yields declined on Tuesday, a sign of improving demand, with investors also snapping up three-year notes at auction, while other signs comforted expectations that the Fed will cut interest rates again at its next meeting this month.

Newly installed Federal Reserve Board Member Stephen Miran called for further easing of monetary policy, while the New York Federal Reserve Bank reported softening labor market expectations among consumers.

The New York Fed survey offered a rare piece of economic data, with central bankers and investors saying they are partly flying blind as a federal government shutdown, now in its seventh day, is preventing the production of crucial economic indicators. The Labor Department on Friday missed the September employment report.

"I think that the market is really just in search of any new piece of information they can find to fill the void that's been created by the government shutdown," said Vail Hartman, U.S. rates strategist at BMO Capital Markets.

"The market's been trapped in a fairly well-defined range between 4.10 and 4.20 in the 10-year sector. I would expect that we continue to oscillate in this range until the next big macro shock, which likely won't come in the form of data."

Given that the Fed has already signaled a rate cut is coming this month, the lack of a full set of data could weigh against deviating from that course of action, Hartman added.

A $58 billion auction of three-year notes saw stiff demand, Lou Brien of DRW Holdings said in an analytical note, with a yield at 3.576% almost a full basis point lower than the market at the bidding deadline.

In money markets, the Federal Reserve's reverse repo facility saw the lowest volume in more than four years, falling to $4.6 billion on Tuesday, as short-term investment funds pulled their cash from the U.S. central bank and placed cash in the overnight repurchase or repo market, where the borrowing rate is higher.

Banks and financial firms such as hedge funds borrow short-term cash in the repo market using Treasuries or other debt securities as collateral.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was last down 3.1 basis points at 4.131%. The yield on the 30-year bond US30YT=TWEB fell 2.9 basis points to 4.729%.

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 55.5 basis points.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 2.3 basis points to 3.574%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities US5YTIP=TWEB was last at 2.419% after closing at 2.412% on Monday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.353%, indicating the market sees inflation averaging about 2.4% a year for the next decade.