TREASURIES-US yields retreat as August inflation moderates

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U.S. 10-year yields on track for largest daily fall in 11 days

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U.S. two-year yields on pace for worst day in two weeks

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U.S. rate futures imply nearly 80 bps in cuts for rest of 2024

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U.S. PCE index rise slows in August

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Univ. of Michigan consumer sentiment improves

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By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 27 (Reuters) - U.S. Treasury yields slipped on Friday after data showed inflation in the world's largest economy continued to ease, boosting the chances of an outsized interest rate cut at the Federal Reserve's November policy meeting.

The benchmark 10-year yield slid 1.8 basis points to 3.771% , on pace for its worst daily fall in 11 days. The 10-year yield had been on an uptrend since the Fed cut interest rates by 50 basis points (bps) on Sept. 18, which is counter-intuitive.

Some analysts though attributed that to technical factors, with Treasury yields having declined sharply for several weeks prior to the Fed's move in anticipation of the central bank's first rate cut in more than four years.

Bud that uptrend shifted after Friday's data showed the personal consumption expenditures (PCE)price index, the Fed's favored inflation measure, rose 0.1% in August after an unrevised 0.2% gain in July. Economists had forecast PCE inflation rising 0.1%. In the 12 months through August, the PCE price index increased 2.2% after rising 2.5% in July.

"When we see headline PCE running 2.2% annually and the month-to-month core PCE 0.1% they can focus more on stimulating the labor market. Labor market is in good shape, but not in great shape," said Michael Brenner, research analyst at investment advisory FBB Capital Partners.

"We have seen this big slowdown in payroll adds. And it's easier for the Fed to cut, and for fixed income investors, lower inflation is a positive thing."

On the shorter end of the curve, the two-year yield was down 2.9 bps to 3.593%, on track for its largest daily decline in nearly two weeks. On the week, however, the two-year yield still managed to eke out a 2-bp gain, its best weekly rise since early August.

Treasury yields slipped further after a report showed the final University of Michigan consumer sentiment survey revealed an upwardly revised September headline increase to a five-month peak of

70.1

, from 67.9 in August. The one-year inflation outlook also dipped to 2.7% from August's 2.8%.

The fact that Michigan's inflation outlook matched the PCE data gave reason for bond investors to nudge yields a little lower.

In other parts of the Treasury market, the yield curve steepened in the wake of the PCE data, with the spread between two-year and 10-year yields hitting 18.1 bps. It was last at 18 bps.

On Friday, the curve was on a bull steepening path, in which rates on the front end are falling more sharply than longer-dated maturities. A bull steepener suggests that more interest rate cuts are underway.

The U.S. rate futures market has priced in a 51% chance of a 50-bp cut in November, up from about 49% before the release of the data, according to LSEG calculations. The chances of a 25 bps move slid to 49% after the inflation data, from 51% pre-PCE report.

For the next two meetings in November and December, the futures market now expect nearly 80 bps in policy easing.

"Friday's ... PCE data increases the likelihood that the Federal Reserve will cut interest rates at both the November and December meetings, as this is yet another data point showing that there is no need for interest rates to be so much higher than the rate of inflation," Clark Bellin, president and chief investment officer at Bellwether Wealth in emailed comments. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Toby Chopra, Jonathan Oatis and Nick Zieminski)