TREASURIES-Longer-dated yields inch higher day after Powell remarks

By Matt Tracy

Sept 24 (Reuters) - Longer-dated U.S. Treasury yields ticked up, while shorter-dated yields inched lower on Wednesday, following remarks by Federal Reserve Chair Jerome Powell pointing to caution around the U.S. central bank's next interest rate decision.

The benchmark U.S. 10-year Treasury note yield US10YT=TWEB hit its highest since September 5 on Monday and was last up 1.5 basis points at 4.133%.

The 30-year bond yield US30YT=TWEB was last up 0.9 bps from Monday's close at 4.746%.

POWELL CITED DANGER OF CUTTING RATES TOO QUICKLY

Yields rose last week despite the Fed's 25-basis-point rate cut and its signal for more easing at future meetings. They declined on Tuesday after Powell, in a speech, cited the danger of cutting rates too quickly and risking a new surge of inflation.

Fed Governor Michelle Bowman and Atlanta Fed President Raphael Bostic expressed similar sentiments in their own remarks on Tuesday.

Newly appointed Fed Governor Stephen Miran, the sole dissenter at last week's meeting in favor of steeper rate cuts, repeated his sentiments on Monday. In contrast, three Fed presidents all voiced caution around rate cuts in their own Monday remarks.

"Not only is the Fed divided on the path of policy rates over the balance of 2025, there is an impressive disagreement between the hawks and the doves as it relates to the outlook for 2026 and beyond," said Vail Hartman, an analyst on the U.S. rates strategy team at BMO Capital Markets, in a written note.

Market participants are looking to further data showing the direction of inflation and the job market for clues to the likelihood of a further rate cut at the Fed's October meeting.

MARKETS EXPECT 25 BPS CUT AT OCTOBER MEETING

Markets are pricing in a 94% chance of a 25 bps cut in October following Powell's Tuesday speech, and 6% odds of a pause. U.S. rate futures have also priced in 44 bps worth of cuts through the end of the year, according to LSEG data.

Economic data has been sparse this week, but included S&P Global's flash U.S. purchasing managers' index releases for September, which pointed to a slowing picture for services and manufacturing. New home sales data will come on Wednesday morning. Market participants are most closely awaiting the Thursday release of the latest initial jobless claims data for last week.

The two-year US2YT=RR yield, which typically reflects interest rate expectations, was last down 1.5 bps from Tuesday's close at 3.577%. It hit a three-week high of 3.6% in afternoon trading on Monday.

The general direction of two-year yields over the last few sessions appears to show the market is "leaning into the arguments of the hawks in the wake of the FOMC," noted BMO's Hartman.

A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was last at 54.3 bps.

The Treasury Department auctioned $69 billion in two-year notes on Tuesday with a bid-to-cover ratio of 2.51x, as dealer demand for new paper has appeared light in recent auctions.

"Primary Dealers ended up with 11.5% of the total, which is closer to the upper end of the recent range, and that reinforces the idea that the demand for this sale was relatively light," noted Lou Brien, economic strategist at DRW Trading Group, in a written note.

The Treasury Department will auction $70 billion in five-year notes US5YT=RR on Wednesday and $44 billion in seven-year notes US7YT=RR on Thursday.