TREASURIES-US Treasury yields mixed as traders evaluate Fed outlook

By Karen Brettell

NEW YORK, Dec 2 (Reuters) - U.S. Treasury yields were mixed on Tuesday and held within their recent trading ranges as investors pondered the outlook for U.S. Federal Reserve monetary policy, after being dragged higher on Monday by an increase in Japanese government bond yields on expectations of an impending rate increase in the country.

The market is seen as already having priced in an expected 25-basis-point cut by the U.S. central bank next week, and traders will now be looking for guidance on any further easing at the conclusion of the December 9-10 meeting.

Fed officials are now in a blackout period and no major data releases are due ahead of the meeting.

“The Fed has seen the biggest data that they'll see before the meeting and I think we're just looking at a period of Treasuries being range-bound and some sort of consolidation,” said Will Compernolle, macro strategist at FHN Financial in Chicago.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations for the Federal Reserve, fell 2.5 basis points to 3.516%.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 0.8 basis points to 4.104%, from 4.096% late on Monday.

Compernolle notes that the 10-year yields have been only periodically below 4% and have struggled to drop to the next level at around 3.88%.

The yield curve between 2-year and 10-year notes US2US10=TWEB steepened by around three basis points to 59 basis points.

Fed expectations have wavered between the probability of a rate cut or being on hold in recent weeks as policymakers diverge. Many Fed officials have expressed concerns about stubbornly high inflation.

“The way that I look at the market moves in the last couple of weeks is a December cut was kind of a coin toss. In a sense, the median market participant was thinking either we're going to get a hawkish December cut or a dovish pause, and they're maybe more or less the same,” Compernolle said.

Fed funds futures traders are now pricing in 87% odds of a cut next week, according to the CME Group’s FedWatch Tool.

“And so with a cut in December, that comes with a lot of patience,” Compernolle said, saying the market is pricing for a hawkish cut.

Meanwhile, the 10-year Japanese bond yield JP10YT=RR was lower on Tuesday after earlier reaching a 17-year high of 1.884%.

The yield jumped on Monday after Bank of Japan Governor Kazuo Ueda said that the central bank will consider the "pros and cons" of raising interest rates at its next policy meeting, giving the strongest signal yet of a hike later this month.

That dragged government bond yields higher globally.