TREASURIES-US yields edge down ahead of data-stuffed week

By Chuck Mikolajczak

NEW YORK, Feb 9 (Reuters) - U.S. Treasury yields edged lower on Monday, easing from earlier gains, with the benchmark 10-year note coming off its biggest weekly drop since the middle of December, ahead of several major economic data releases this week.

Data expected this week includes monthly retail sales for December, the Consumer Price Index (CPI) for January, and the nonfarm payrolls report for January, which was delayed due to a brief U.S. government shutdown that ended last week.

Markets are currently pricing in roughly 50 basis points of interest rate cuts from the Federal Reserve this year, with expectations for a reduction of at least 25 basis points not topping 50% until the U.S. central bank's June 16-17 meeting, according to CME Group's FedWatch Tool, which would be the first with Fed chief nominee Kevin Warsh leading the central bank should he be confirmed by the Senate.

"The general trajectory for inflation should be modestly lower, the curveball of goods inflation remains a key question, services inflation should keep coming down and so that should allow Warsh and the Fed to cut rates later this year," said Bill Merz, head of capital markets research at U.S. Bank Asset Management Group in Minneapolis.

"That's providing a degree of an anchor on Treasury yields across the curve, and that remains to be the case despite the day-to-day fluctuations that we've been seeing.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB slipped 0.8 basis point to 4.198% after falling 3.5 basis points last week, its biggest drop in eight weeks. The yield on the 30-year bond US30YT=TWEB also edged down 0.8 basis point to 4.847%.

White House economic adviser Kevin Hassett said that U.S. job gains could be lower in the coming months due to slower labor force growth and higher productivity, a factor that is likely to impact the Fed's policy decisions.

MORE SUPPLY SCHEDULED THIS WEEK

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, which is seen as an indicator of economic expectations, was at a positive 71.3 basis points after rising to 73.7, its highest reading since April 9.

More supply will come to the market this week as the Treasury auctions $58 billion in three-year notes US3YT=RR on Tuesday, $42 billion in 10-year notes on Wednesday and $25 billion in 30-year bonds on Thursday.

Japanese Prime Minister Sanae Takaichi renewed a pledge to cut a sales tax on food, after her ruling coalition's landslide election win brightened chances for stimulus measures that have rattled financial markets.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, dipped 1.2 basis points to 3.483%.

Yields had moved higher earlier in the day after Bloomberg News reported that Chinese regulators have advised financial institutions to curb holdings of U.S. Treasuries because of concerns over concentration risks and market volatility, citing people familiar with the matter.

Officials urged banks to limit purchases of U.S. government bonds and instructed those with high exposure to pare down positions, though the advisory does not apply to state holdings.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.521% after closing at 2.508% on February 6.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.337%, indicating the market sees inflation averaging about 2.3% a year for the next decade.