TREASURIES-Yields rise in wake of Fed supersized rate cut

By Matt Tracy

Sept 20 (Reuters) - U.S. Treasury yields ticked higher and the most watched section of the yield curve flattened back a bit from its steepest level in 27 months, consolidating moves after this week's solid economic data and the Federal Reserve's super-sized rate cut.

Longer-dated Treasury yields are currently gaining less than shorter-dated yields, but rose more than front-end yields after the Fed eased 50 basis points on Wednesday, suggesting that market participants expected a pick-up in inflation expectations at some point in the future.

Benchmark 10-year Treasury yields rose 2.4 basis points (bps) on Friday. It hit its highest level in about two weeks at 3.768% on Thursday following the release of stronger-than-expected initial jobless claims figures for last week.

"The market has gotten too bearish on inflation expectations (and is) pricing in too many rate cuts" said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

"All of the recent data points to continued strength in the economy," she added, pointing to recent strong economic data such as the lower-than-expected claims and strong retail sales.

On the front end of the curve, two-year yields ticked up 1.2 bp and were last at 3.616%.

The yield curve, a widely-tracked barometer of the economic outlook, steepened after the Fed's 50 bp rate cut announcement on Wednesday. The spread between the two-year and 10-year yields hit 14.7 bps at one point, the widest gap since June 2022. It has since narrowed and was last at positive 11.1 bps.

Fed futures traders have priced in 71 bps in rate cuts by the end of this year, and roughly 187 bps in cuts by September 2025.

Meanwhile the majority of

economists polled

by Reuters anticipate two more 25 bp rate cuts at the Fed's final two meetings this year.

Rajappa said she expects yields on the long-end of the curve have more room to rise in the near-term, while front-end yields have little room to decline from their current levels.

The 30-year Treasury's yield was down 0.6 bps on Friday and was last at 4.068% after hitting a two-week high on Thursday.

"Lower rates mean inflation might not continue to decline as much as projected, which makes long bond investors nervous and demand more yield," said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors.

No economic data is scheduled to be released on Friday, but Fed speakers are free to comment on the new monetary policy framework now that the pre-FOMC blackout period is lifted. Philadelphia Fed President Patrick Harker is set to speak at 2 p.m. EDT/1800 GMT.

(Reporting by Matt Tracy, Editing by Nick Zieminski)