TREASURIES-US yields edge higher after bond rally as rate cut size uncertain

By Davide Barbuscia

NEW YORK, Sept 9 (Reuters) - U.S. Treasury yields rose on Monday as some investors took profits after a bond rally last week driven by a weakening labor market, which left market participants uncertain over the size of an expected Federal Reserve interest rate cut this month.

Treasury yields, which move inversely to prices, touched an over one-year low on Friday after data showing U.S. employers added far fewer workers than economists had expected in August and July, cementing expectations that the U.S. central bank will start cutting rates at its Sept. 17-18 rate-setting meeting.

Those gains were partly reversed on Monday.

"The reality set in that the market moved a little too much to lower yields on Friday and so there was a decent window to sell paper at richer levels," said Tom di Galoma, head of fixed income trading at Curvature Securities.

Investors were also selling ahead of Treasury auctions this week of three-, 10- and 30-year paper, as well as on expectations of heavy corporate debt supply as issuers try to take advantage of lower yields, he added.

Rates futures traders on Monday were assigning a 73% chance of a 25 basis point interest rate cut by the Fed next week, slightly more than what was priced in last week, according to CME Group data. Expectations of a 50 basis point cut were at 27%, down from 30% on Friday.

Uncertainty over the magnitude of the first rate cut could cause some volatility in Treasuries for the rest of the week, with investors looking at consumer price data on Wednesday for more clarity over the pace of disinflation in the economy.

The U.S. presidential debate between Democratic candidate Kamala Harris and Republican candidate Donald Trump on Tuesday could also cause some price fluctuations in the bond market, investors said.

Benchmark 10-year Treasury yields were at 3.734% in early trade, some two basis points higher, and two-year yields were about three points higher at 3.683%.

The closely watched part of the Treasury yield curve comparing two- and 10-year yields, at nearly five basis points, was slightly flatter than on Friday, when the spread of 10-year yields over two-year yields was the largest since July 2022. (Reporting by Davide Barbuscia; Editing by Andrea Ricci)