TREASURIES-US yields edge lower as Fed rate decision looms

By Tatiana Bautzer

NEW YORK, Oct 28 (Reuters) - U.S. Treasury yields edged lower on Tuesday as markets remained in a holding pattern ahead of the Federal Reserve's interest rate decision on Wednesday following a two-day policy meeting.

Data released on Tuesday, including ADP private payrolls and U.S. consumer confidence, had little impact on yields overall.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB slipped 1.2 basis points to 3.981% in afternoon trading.

Markets are expected to remain sideways through the interest rate announcement by the policy-setting Federal Open Market Committee, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.

"The Fed will probably continue to be biased more towards its labor market mandate than inflation," she added.

Investors expect a 25-basis point rate cut on Wednesday and CME's FedWatch tool puts the odds of another rate cut in December above 90%.

On Tuesday, U.S. data showing private payrolls increased by an average of 14,250 jobs in the four weeks ending October 11 weighed modestly on yields. ADP said on Tuesday it would publish a weekly preliminary estimate of the ADP National Employment Report every Tuesday effective October 28, based on its high-frequency data.

Even though the ADP data seemed to be positive, it was tempered by the layoff announcements by big companies such as Amazon AMZN.O and UPS UPS.N, analysts said.

"High-profile layoff announcements highlight the risk of a potential higher unemployment rate since hirings have slowed," said Vail Hartman, U.S. rates strategist at BMO Capital Markets in New York.

U.S. consumer confidence data also had little impact on Treasuries. The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, was flat at 3.496%.

DATA AND SHUTDOWN IMPACT

Analysts will be closely watching for any Fed comments regarding the availability of economic data during the U.S. government shutdown. While the release of key macroeconomic indicators was suspended throughout October, regional Federal Reserve banks may still have access to alternative data sources, said Rajappa of Societe Generale.

In any case, it will become more difficult to understand what is happening to the U.S. economy, she said.

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, hit 47.6 bps, the narrowest gap since September 12. The curve was last at 48.6 bps, compared with the 48.5 bps late on Monday.

The yield curve showed a bull flattening trend, in which rates on the long end are falling faster than those on the front end of the curve. This scenario often precedes a move by the Fed to cut interest rates.

Also on Tuesday, the Treasury auctioned $44 billion in seven-year notes which showed soft results. The auction priced at 3.79%, higher than the expected rate at the bid deadline, which meant that investors wanted a premium to buy the note.

Post-auction, U.S. seven-year yields were down 1.2 bps at t 3.775% after the auction.