TREASURIES-US yields decline amid speculation on large Fed rate cut

By Davide Barbuscia

NEW YORK, Sept 13 (Reuters) - U.S. Treasury yields moved lower on Friday as the possibility of a supersized interest rate cut by the Federal Reserve next week gained ground again.

Former New York Federal Reserve President Bill Dudley said on Thursday there was a strong case for a 50 basis point interest rate cut at the Fed's Sept. 17-18 rate-setting meeting.

Market participants also mentioned news articles in the Financial Times and the Wall Street Journal, which highlighted that the size of the first cut could be a close call for Fed officials, as factors that spurred bets on a large cut next week.

The probability of a 50 basis point cut rose to 51% on Friday from 28% on Thursday, CME Group data showed.

Tony Farren, managing director in rates sales and trading at Mischler Financial Group, said he was skeptical about the repricing and expected yields to turn higher.

"I'm looking for the market to pull back here; I just don't see the economic and inflation data justifying a 50 basis point rate cut," he said.

Others echoed that view.

"We maintain that a quarter-point initial cut is the path of least resistance, although it is clear that 50 bp is on the table and will be part of the Fed's conversation," rates strategists at BMO Capital Markets said in a note.

A release by the Labor Department's Bureau of Labor Statistics showed on Friday U.S. import prices dropped by the most in eight months in August amid lower costs for fuels and food products, suggesting domestic inflation will continue to subside in the months ahead. Two-year yields declined briefly after the data.

Benchmark 10-year yields were last at 3.662%, down from 3.68% on Thursday. Two-year yields, more closely linked to monetary policy expectations, declined to 3.578% from 3.648% on Thursday.

The curve comparing 10- and two-year yields, which investors look at closely for its signals on the economic outlook, widened to 8.7 basis points, the steepest it has been since July 2022. (Reporting by Davide Barbuscia; editing by Jonathan Oatis)