TREASURIES-Yields fall as job openings shrink before Friday's jobs report

(Updated at 1110 EDT)

By Karen Brettell

NEW YORK, Sept 4 (Reuters) - Treasury yields fell on Wednesday and the closely watched yield curve between two-year and 10-year notes turned positive after data showed that U.S. job openings dropped to a 3-1/2-year low in July.

The data comes before Friday's jobs report for August, which may be key as to whether the Federal Reserve's expected interest rate cut at its Sept. 17-18 meeting will be by 25 or 50 basis points.

"The big event of the week comes in the form of Friday's payrolls print," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

"That's to a large extent going to give us the road map for what to expect from the Fed. The employment data is now overshadowing inflation as the biggest risk to near-term policy expectations," he said.

Investors are closely watching jobs data for any signs that the U.S. economy is likely to tip into recession.

Wednesday's move in the 2/10 yield curve is a possible ominous sign in this direction, if it sticks.

The 2/10 part of the yield curve has been mostly inverted since July 2022. It briefly turned positive on Aug. 5 before turning negative again.

The inversion, in which longer-dated yields are lower than shorter-dated ones, is typically viewed as a sign that a recession is likely within the next 18 months to two years, though the current inversion has lasted longer than in previous episodes.

The curve then typically turns positive before an economic downturn sets in as investors price in expected rate cuts by the Fed.

Treasury yields fell on Tuesday as stocks tumbled, which was blamed in part on weak manufacturing data raising concerns about the growth outlook. Some analysts, however, see the U.S. economy as likely to slow but avoid a recession.

Friday's employment report is expected to show that employers added 160,000 jobs during the month, according to the median estimate of economists' polled by Reuters. The unemployment rate is anticipated to ease to 4.2%, from 4.3% the prior month.

Traders are pricing in a 55% chance of a 25 basis point rate reduction, and a 45% chance of a 50 basis points cut, according to the CME Group's FedWatch Tool. The Fed is expected to make further cuts at its November and December meetings.

Interest rate-sensitive two-year note yields were last down 8.9 basis points on the day at 3.7992%. Benchmark 10-year note yields fell 4.7 basis points to 3.797%.

The yield curve between two- and 10-year yields was at minus 0.40 basis point after earlier trading at positive 0.60 basis point. (Reporting by Karen Brettell; editing by Jonathan Oatis)