TREASURIES-Yields inch higher driven by busy bond supply

(Updates with latest market activity throughout)

By Matt Tracy

Sept 24 (Reuters) - U.S. Treasury yields inched higher on Wednesday, driven by higher corporate and government bond supply, a day after Federal Reserve Chair Jerome Powell signaled caution around the U.S. central bank's next interest rate decision.

The benchmark U.S. 10-year Treasury note yield hit its highest since September 5 on Monday and was last up 1.7 basis points at 4.136%.

The 30-year bond yield was last up 1 bp from Monday's close at 4.747%.

A handful of multibillion dollar high-grade corporate bond offerings came to the market, including an

$18 billion six-part senior note package

from U.S. software maker Oracle. Analysts at BMO Capital Markets noted that deal by itself will push September supply well over the $178 billion record scored in September last year.

"Wednesday's weakness was more about the technicals and weight of supply (in both corporate and Treasury bonds) than the evolution of investors' views of the macro fundamentals," Vail Hartman, an analyst on the U.S. rates strategy team at BMO, said in an interview.

Government bond supply on Wednesday was driven by an auction of $70 billion in five-year notes, which followed Tuesday's $69 billion two-year auction. The five-year auction had a 2.34x bid-to-cover ratio, while Tuesday's two-year auction saw a 2.51x bid-to-cover, as dealer demand for new paper has appeared light in recent auctions.

"Primary Dealers ended up with 11.5% of the total, which is closer to the upper end of the recent range, and that reinforces the idea that the demand for this sale was relatively light," said Lou Brien, economic strategist at DRW Trading Group, in a written note.

The Treasury Department will auction $44 billion in seven-year notes on Thursday.

The two-year yield, which typically reflects interest rate expectations, was last down 3.6 bps from Tuesday's close at 3.598%. It hit a three-week high of 3.6% in afternoon trading on Monday.

The general direction of two-year yields over the last few sessions appears to show the market is "leaning into the arguments of the hawks in the wake of the FOMC," noted BMO's Hartman.

A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year Treasury notes , seen as an indicator of economic expectations, was last at 54.1 bps. Yields rose last week despite the Fed's 25-basis-point rate cut and its signal for more easing at future meetings. They declined on Tuesday after Powell, in a speech, cited the danger of cutting rates too quickly and risking a new surge of inflation.

Market participants are looking to further data showing the direction of inflation and the job market for clues to the likelihood of a further rate cut at the Fed's October meeting.

Markets are pricing in a 94% chance of a 25 bps cut in October following Powell's Tuesday speech, and 6% odds of a pause. U.S. rate futures have also priced in 44 bps worth of cuts through the end of the year, according to LSEG data. Economic data has been sparse this week, but included S&P Global's flash U.S. purchasing managers' index releases for September, which pointed to a slowing picture for services and manufacturing.

New home sales data will come on Wednesday morning. Market participants are awaiting the Thursday release of the latest initial jobless claims data for last week. (Reporting by Matt Tracy; Editing by Alex Richardson and Richard Chang)