TREASURIES-Longer-dated US yields rise ahead of 10-year auction

By Chuck Mikolajczak

NEW YORK, Aug 6 (Reuters) - Longer-dated U.S. Treasury yields were higher on Wednesday ahead of an auction of benchmark 10-year notes by the Treasury, and as the market awaits President Donald Trump's choice to fill a vacancy on the Federal Reserve's Board of Governors.

The Treasury will auction $42 billion in 10-year notes later on Wednesday. The sale follows a somewhat soft auction of $58 billion in three-year notes US3YT=RR on Tuesday and ahead of a $25 billion auction of 30-year bonds on Thursday.

"Those yields are obviously still attractive if you think rates are going to come down. To be able to buy the 10-year where it is today, if you think rates are going to be cut materially over the next 12 to 15 months, that's a pretty good position to be in, so those could go pretty well," said JP Powers, chief investment officer at RWA Wealth Partners in Boston.

Yields have been moving lower in recent sessions, including a steep drop on Friday, following a weak government payrolls report and an announcement from the Fed that Governor Adriana Kugler was resigning early, which bolstered market expectations for a rate cut from the central bank at its September meeting.

Data on Tuesday, however, from the Institute for Supply Management showed a slowing in the services sector and indicated price pressures had increased. That helped to cool expectations for a cut and sent yields on shorter-dated yields higher.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 2.4 basis points to 4.22% and was poised to snap a four-session streak of declines.

Trump said on Tuesday he will decide on a nominee to fill Kugler's vacancy, after she leaves on Friday, by the end of the week.

"We're relying on the Fed to sort of provide this backstop that they've become for markets and they've built up this buffer where they have plenty of room to cut rates if the economy does falter. But if that's kind of called into question, if the motives behind why they're doing that, then that could be concerning for not just the bond markets, but for equity markets as well," said Powers.

The yield on the 30-year bond US30YT=TWEB rose 3.4 basis points to 4.803%.

Minneapolis Fed President Neel Kashkari said on Wednesday the Fed may need to cut rates in the near term to account for a slowing economy, although it remains unclear how long it will take for the effect of tariffs to become apparent.

A part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB that market participants monitor as an indicator of economic expectations, was at a positive 50 basis points after hitting a 2-1/2 week high of 54.9 on Monday.

Fed officials due to speak later on Wednesday were Governor Lisa Cook, Boston President Susan Collins and San Francisco President Mary Daly.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, edged up 0.2 basis point to 3.718%.

Market expectations for a September rate cut of at least 25 basis points from the Fed stood at 91.2%, down from the 92.9% on Tuesday but above the 46.7% from a week ago, according to CME's FedWatch Tool.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.436% after closing at 2.424% on Tuesday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.355%, indicating the market sees inflation averaging about 2.4% a year for the next decade.