TREASURIES-US yields mixed as markets reset rate cut expectations

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U.S. 10-year yields hit new 10-week high

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U.S. two-year yields pull back from seven-week peaks

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U.S. yield curve steepens

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U.S. three-year note auction shows lackluster results

(Adds comment, bullets, U.S. three-year note auction results, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 8 (Reuters) -

U.S. Treasury yields were mixed on Tuesday in choppy trading as short-term rates fell, while those on the long end inched higher on factors such as Federal Reserve monetary policy, investor positioning, and economic outlooks affecting market moves.

Shorter-dated yields fell further after the U.S. Treasury's three-year note auction ended up weaker than expected. Some investors had expected higher demand given how much the note had sold off, pushing yields lower, in the last few sessions after a successful sale last month.

Investors continued to recast expectations about the Fed's ongoing easing policy and awaited minutes of the central bank's September meeting for more clarity on what prompted a jumbo rate cut while the economy remained resilient. The minutes are scheduled to be released on Wednesday.

The U.S. rate futures market has priced in an 88% probability of a 25 basis-point (bp) rate cut at next month's meeting, and a 12% chance that the Fed could pause. Before Friday's blockbuster September jobs report that shifted the market's thinking, rate futures had implied a 50% chance the Fed would go for the bigger rate cut of 50 bps, with the other half betting on 25 bps.

Investors also said that for most of the year, the market had factored in a sizable number of rate cuts over the next two years, and a pullback from those expectations was seen as overdue.

"The economic numbers that we have gotten of late culminating in last Friday's jobs report didn't validate the rally we saw in Treasuries over the summer," said Kevin Flanagan, head of fixed income strategy, at WisdomTree in New York.

"The actual reaction is this correction in the market. You have moves like this: 40-50 basis points in a matter of weeks. Often times, what you see are long positions start to get liquidated. So it feeds into this sell-off and it works the other way too on the shorts side."

In afternoon trading, the benchmark 10-year yield was marginally higher at 4.028%, advancing for a fifth straight session and hitting a fresh 10-week high of 4.057%.

U.S. 30-year yields also hit their highest since late July at 4.342% and were last up 1.5 bps at 4.319%.

On the short-end of the curve, U.S. two-year yields pulled back from seven-week peaks hit on Monday, to trade 4 bps lower at 3.965%.

Post-auction, U.S. three-year yields fell 2.7 bps to 3.876% , sliding after the auction's yield came in at 3.878%, higher than the forecast at the bid deadline. This suggested that investors demanded a premium to take the three-year note.

The bid-to-cover ratio, a gauge of investor appetite, was 2.45, the lowest since June.

The yield curve steepened, with the spread between the two-year and the 10-year yield at positive 5.6 bps , from 2.9 bps late on Monday.

The curve briefly inverted on Monday as market participants reduced expectations of an aggressive rate-cutting cycle.

Fed speakers on Tuesday did not provide much insight on the path of interest rates, other than to say that they are headed lower. Atlanta Federal Reserve President Raphael Bostic said while the labor market has slowed, it is "not slow", calling the monthly jobs creation "pretty robust."

However, Fed Governor Adriana Kugler said she strongly supported the U.S. central bank's recent rate cut and

would support further reductions

if inflation continues to ease as she expects.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by David Evans and Richard Chang)