TREASURIES-US yields steady as prospect of gradual start to rate cuts firms up

By Davide Barbuscia

NEW YORK, Sept 12 (Reuters) - U.S. Treasury yields were roughly unchanged on Thursday after economic data cemented investor expectations the Federal Reserve will begin a gradual decrease in interest rates next week.

U.S. producer prices increased slightly more than expected in August, but the trend remained consistent with subsiding inflation. On the labor market side, meanwhile, data on Thursday showed the number of Americans filing new applications for unemployment benefits increased marginally last week.

The data did not alter investor expectations of a 25-basis-point interest rate cut by the U.S. central bank at its Sept. 17 to 18 rate-setting meeting. Bets for a bigger, half-percentage point cut were curbed on Wednesday when consumer price data showed inflation remains somewhat sticky.

"The initial (jobless) claims were benign as far as any relationship to movement in bond prices," said Lou Brien, market strategist at DRW Trading in Chicago.

Traders in rates futures were assigning a 13% chance to a 50-bps cut next week, in line with Wednesday, with the consensus remaining largely on a 25-bps reduction adjustment, CME Group data showed.

"The market has been expecting the Fed to move next week and they're likely to move," said Erik Aarts, senior fixed income strategist at Touchstone Investments. "Some in the marketplace thought there could be a larger cut next week; we don't think so, we're firmly in the camp of getting 25 basis point as the start of rate cuts," he said.

Bond investors on Thursday were also closely scrutinizing the European Central Bank, which cut interest rates again as inflation slows and economic growth falters. The ECB cut its deposit rate by 25 bps to 3.50%, as expected, following a similar cut in June.

Later on Thursday, the Treasury will sell $22 billion in 30-year bonds, the last leg of this week's U.S. government bond supply. A 10-year note auction was well received on Wednesday.

Benchmark 10-year Treasury yields were last at 3.659%, just slightly higher on the day. Two-year yields , which tend to more closely reflect expectations of changes in monetary policy, were last at 3.641%, a touch lower than on Wednesday.

The curve comparing 10- and 2-year yields, closely watched by investors for its signals on the economic outlook, steepened to 1.4 basis points from less than one on Wednesday. (Reporting by Davide Barbuscia; Editing by Emelia Sithole-Matarise)