TREASURIES-US yields gain as markets see slower easing cycle after Powell's comments

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U.S. two-year yield has largest quarterly fall since Jan 2020

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U.S. two-year yields rise to two-week peak

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U.S. 10-year yields post biggest quarterly decline since October

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Fed's Powell says no preset course for monetary policy

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U.S. rate futures price in higher odds of 25-bp cut in November

(Recasts; adds analyst comment, graphics, quarterly milestones, Fed's Powell's comments, bullets, byline; updates prices)

By Gertrude Chavez-Dreyfuss and Alden Bentley

NEW YORK, Sept 30 (Reuters) - U.S. Treasury yields rose across the board on Monday after Federal Reserve Chair Jerome Powell suggested the central bank will take a gradual approach in cutting interest rates, noting monetary policy is not on any "preset course."

The U.S. two-year yield, the most sensitive to Fed rate move expectations, hit a two-week peak of 3.672% following Powell's comments. It was last up 8.2 bps at 3.645%, on pace for its largest daily gain since mid-August.

It was a different story for the third quarter however. The two-year yield has fallen 107 bps, it worst quarterly decline since January 2020.

In remarks prepared for delivery at a National Association for Business Economics conference in Nashville, Tennessee, Powell said "if the economy evolves broadly as expected, policy will

move over time

toward a more neutral stance."

He added the "risks are two-sided, and we will continue to make our decisions meeting by meeting."

The Fed chair also sees two more interest rate cuts, totaling 50 basis points, this year as a baseline "if the economy performs as expected," though the Fed could cut faster if needed, or slower.

Powell's comments raised the odds for the smaller 25 basis-point cut at the November meeting to 62% and about 38% for 50 bps, according to LSEG estimates. It was a toss-up before Powell's remarks. For 2024, the rate futures have priced in about 73 bps in cuts, down from roughly 80 bps on Friday.

"Powell is trying to temper things a little bit. It's probably the right thing to do," said Greg Faranello, head of U.S. rates strategy at AmeriVet Securities in New York.

"If you listened to Fed speak since their meeting, they have definitely leaned more toward a gradual course lower ... the economy has weakened a little bit here and there, but there are still pockets that have done well."

The benchmark 10-year yield gained 3.9 bps to 3.790% . For the third quarter, the 10-year yield has dropped 55 bps, the worst quarterly fall since October 2023.

U.S. 30-year yields, meanwhile, advanced 2.7 bps to 4.124%. They sank 38 bps in the third quarter for the worst quarterly showing since October last year as well.

The Treasury yield curve flattened following Powell's remarks, with the spread between two-year and 10-year yields hitting positive 13 bps, the tightest spread in 10 days. It was last at 14.3 bps.

The curve is described as a bear flattener, in which short-term rates are rising faster than longer-dated maturities. This reflects expectations the Fed could take its time cutting interest rates, and that pushes yields on the front end higher.

Other Fed speakers on Monday were a little more dovish.

Atlanta Fed President Raphael Bostic, a voter at this year's Federal Open Market Committee, said he would be

open to another 50-bp rate cut

at the U.S. central bank's meeting in November if upcoming data show job growth slowing faster than expected.

Chicago Fed President Austan Goolsbee, who will be a voter on the FOMC next year, reiterated on Monday he sees a case for

extensive

U.S. central bank interest rate cuts given the current state of the economy and where it is likely to go.

The bond market is also bracing for a slew of economic data this week, culminating in Friday's September payrolls report. The employment side of the Fed's dual mandate has taken on more importance in the last two months or so as inflation cooled.

Tuesday brings the August JOLTS job openings release and on Thursday ADP national employment data and weekly jobless claims will set the stage for the main employment news Friday.

"We definitely switched off on inflation and we're uber-focused on jobs," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.

(Reporting by Gertrude Chavez-Dreyfuss and Alden Bentley; Editing by Susan Fenton and Chris Reese)