TREASURIES-US yields decline ahead of US presidential debate, inflation data

(Updates at 1500 ET)

By Davide Barbuscia

NEW YORK, Sept 10 (Reuters) - U.S. Treasury yields declined on Tuesday on economic worries, ahead of a key U.S. presidential candidates' debate and before Wednesday's release of inflation data, which could fuel speculation on the size of the Federal Reserve's first interest rate cut.

Republican U.S. presidential candidate Donald Trump and Democratic Vice President Kamala Harris will meet in their first and perhaps only debate later on Tuesday, a clash that could prove pivotal in their battle for the White House. The debate will likely refocus the bond market on the election and the policy implications of the candidates, BMO Capital Markets Rates Strategists Ian Lyngen and Vail Hartman said in a note, adding this could lead to higher yields.

"The presumption of upward pressure on yields is a function of the fact that in either case (Harris or Trump), the next President will continue to allow deficit spending that requires funding in the Treasury market," they wrote.

"Supply isn't the largest influence in the US rates market, but it's certainly a relevant one as 'the deficit hawk' in Washington DC has become an endangered species - if not completely extinct."

Harris' late entry in the presidential race after President Joe Biden's withdrawal in July tightened the race, prompting a reversal of bond trades that were put in place on expectations of a second Trump presidency, which had led to higher U.S. Treasury yields on expectations of higher inflation and wider budget deficits under Trump.

Wednesday's consumer price data, however, could outweigh any short-term reaction to the presidential debate, with an acceleration in the pace of disinflation in the economy potentially strengthening the case for a 50 basis point cut by the Fed at its Sept. 17-18 meeting.

"If inflation comes pretty meager ... that would make the Fed more open to a 50 basis point cut, but if it comes hotter than expected, 25 basis points is an easier choice," said Matt Miskin, co-chief investment strategist at John Hancock Investment Management.

On Tuesday, lower oil prices - with Brent crude futures

falling

below $70 a barrel for the first time since December 2021 - renewed concerns over the health of the global economy, while bond traders priced in a deeper rate-cutting path for the next few months.

"A combination of lower inflationary and lower growth outlooks are putting downward pressure on Treasury yields, and the other component, of course, is expectations around the Fed," said Mona Mahajan, senior investment strategist at Edward Jones.

Rates futures traders were assigning a 67% probability to a 25 basis point cut by the U.S. central bank at its rate-setting meeting next week, down from 70% on Monday. Chances of a deeper, 50 basis point cut were seen at 33%, up from 30% on Monday, CME Group data showed.

Separately, according to a majority of economists in a

Reuters poll

, the Fed will lower interest rates by 25 basis points at each of its three remaining policy meetings in 2024.

Benchmark 10-year yields were last at 3.644%, about five basis points lower than on Monday. Two-year yields stood at 3.61%, nearly six points lower. The closely watched part of the yield curve comparing those two maturities stood at over three basis points, steeper than on Monday.

On the supply side, the Treasury on Tuesday sold $58 billion in three-year notes with a high yield of 3.44%. The sale met solid demand, as the notes were sold nearly two basis point below the expected rate at the time of the bid deadline - a sign that investors were willing to pay up.

Tuesday's auction will be followed by sales of 10-year notes and 30-year bonds on Wednesday and Thursday, respectively.

(Reporting by Davide Barbuscia, Editing by Nick Zieminski)