TREASURIES-US Treasury yields fall as weak manufacturing data persists

*

ISM manufacturing PMI rose to 47.2 in Aug, still indicating contraction

*

Fed expected to cut rates by at least 25 bps at September meeting

*

Two-year Treasury yield fell 6.2 bps, biggest drop since August 23

(Updated at 2:33 p.m. ET/1833 GMT)

By Chuck Mikolajczak

NEW YORK, Sept 3 (Reuters) - U.S. Treasury yields fell on Tuesday, with the benchmark 10-year note set to break a five-session streak of gains, after data signaled activity in the manufacturing sector remains soft.

The Institute for Supply Management (ISM) said its manufacturing PMI rose to 47.2 in August from an eight-month low of 46.8 in July, and remained below the 50 reading to indicate contraction for the fifth straight month.

"The bounce in manufacturing from July's abysmal reading wasn't all that great. New orders dropped, which doesn't augur well for a future rebound in activity," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"The Fed cares about the labor market, not the manufacturing sector. It will take service sector weakness to scare the Fed into doing more than a 25 basis point cut and that just doesn't seem to be in the cards for now."

Investors will get a host of data on the labor market this week, culminating in Friday's key government payrolls report.

The yield on the benchmark U.S. 10-year Treasury note fell 5.7 basis points (bps) to 3.854%. The yield snapped a two-week streak of declines last week as economic data boosted expectations the Fed was more likely to opt for a smaller cut of 25 basis points at its Sept. 18 policy announcement.

Markets have fully priced in a rate cut of at least 25 bps at the upcoming meeting, with expectations for a cut of 50 bps climbing to 37% after the data, up from 30% in the prior session, according to CME's FedWatch Tool.

The yield on the 30-year bond fell 5.3 basis points to 4.143%.

Recent comments from Fed policymakers signal the majority are ready to support a rate cut by the central bank at its September meeting.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 3.8 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 3.7 basis points to 3.865%, on track for its biggest daily drop since Aug. 23.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 1.984% after closing at 2.034% on August 30.

The 10-year TIPS breakeven rate was last at 2.112%, indicating the market sees inflation averaging about 2.1% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Alexander Smith and Jonathan Oatis)