TREASURIES-US yields edge lower with Fed statement on deck

By Chuck Mikolajczak

NEW YORK, Dec 10 (Reuters) - U.S. Treasury yields slipped on Wednesday, ahead of a policy announcement by the Federal Reserve in which the central bank is widely expected to cut interest rates.

The Fed is expected to reduce rates by 25 basis points as policymakers grapple with gaps in economic data caused by the recent government shutdown and work through competing views about the risks facing the economy.

Markets are pricing in an 89.9% chance of a 25 basis point cut, according to CME's FedWatch Tool, with many market participants anticipating a "hawkish cut," in which the Fed may indicate it plans to slow or halt the path of rate reductions.

Yields around the globe have been climbing in recent weeks, as many central banks have signaled they are either at or near the end of their own easing cycles, while the Bank of Japan is widely anticipated to hike rates at its policy meeting next week.

"The market is thinking about the whole picture of global sovereign yields, and we're at the end of the line here in terms of rate cuts from the rest of the world," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin, Texas.

"Inflation is not really just going away, it's not just a U.S. problem, and if you get to the point where you're kind of tipping the easing scale too much, the natural reaction function from the investor base is going to be we need to have some term premium because this could reignite inflation pressures. And obviously, that's not good for bonds."

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB dipped 1.2 basis points to 4.174% and was on track to snap a four-session streak of gains, its longest run in five weeks.

U.S. economic data showed the Employment Cost Index (ECI), the broadest measure of labor costs, rose 0.8% in the last quarter, versus expectations of economists polled by Reuters for a 0.9% advance, after gaining 0.9% in the second quarter.

The yield on the 30-year bond US30YT=TWEB fell 1.9 basis points to 4.79%.

Several major brokerages recently forecast a cut by the Fed for Wednesday's meeting.

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 57.2 basis points.

After solid auctions of 3-year US3YT=RR and 10-year notes earlier this week, more supply will come to the market on Thursday in the form of $22 billion in 30-year bonds.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, declined 1.3 basis points to 3.6%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.313% after closing at 2.332% on December 9.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.257%, indicating the market sees inflation averaging about 2.3% a year for the next decade.