TREASURIES-US yields steady as market bets on size of rate cuts

By Matt Tracy

Sept 16 (Reuters) - U.S. Treasury yields were flat on Monday after a Friday bond rally, as investors weigh the odds of a half-percentage point interest rate cut by the Federal Reserve this week.

Benchmark 10-year Treasury yields were at 3.657% in early trading, while two-year yields were at 3.586%.

Treasury yields, which move inversely to prices, moved lower last week after growing speculation around a 50 basis point rate cut at the Fed's Sept. 17-18 rate-setting meeting.

Former New York Federal Reserve President Bill Dudley said on Sept. 12 there was a strong case for a 50 basis point cut, while investors made sizeable bets on the outcome.

The probability of a 50 basis point cut was last seen at 63% on Monday, up from 51% on Friday, CME Group data shows.

A key factor heading into this week's Fed meeting will be how the central bank handles these market expectations, at the same time inflation has been cooling and the labor market has shown signs of weakness.

"While we're still in the 25 bp camp, we'll concede that the more aggressively the market prices in 50 bp, the more compelled the Fed will be to follow-through with such a move," Ian Lyngen, director of fixed income strategy at BMO Capital Markets, wrote in a Monday note.

Some in the market were skeptical, however, about whether such a large cut was necessary as recent signs point to still-sticky inflation, and uncertainty swirls around November's U.S. presidential election.

"I don't think 50 (basis points) is warranted, because 25 gives them more optionality to say, 'Hey, we can do more, but it's an election year,'" said Jack McIntyre, portfolio manager for global fixed income at Brandywine Global Investment Management.

The curve comparing 10- and two-year yields, which investors look at closely for its signals on the economic outlook, widened to about 8 basis points on Monday from 7 basis points on Friday, the steepest it has been since July 2022.

August retail sales data, scheduled for release on Tuesday, will be perhaps the most important economic data point heading into this week's Fed meeting, market participants said. (Reporting by Matt Tracy; editing by Jonathan Oatis)