TREASURIES-US yields rise after Japan quake with Fed meeting on deck

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Japan earthquake prompts concerns over inflation, economic growth

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Fed expected to announce rate cut on Wednesday

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US Treasury yields rise, with 10-year note reaching highest level since September

(Updates to afternoon US trading)

By Chuck Mikolajczak

NEW YORK, Dec 8 (Reuters) - Benchmark U.S. 10-year Treasury yields rose on Monday, with yields accelerating to the upside after a powerful earthquake hit Japan and as investors were preparing for the Federal Reserve's next policy announcement. A magnitude 7.5 earthquake shook Japan's northeast region, prompting orders for residents to evacuate and tsunami warnings, which were later downgraded to advisories. The Bank of Japan (BOJ) has been under pressure to hike interest rates to combat inflation and attempt to stoke economic growth, and was expected to proceed with an increase in borrowing costs at its policy meeting next week. Japan's economy contracted faster than initially estimated in the three months through September, the Cabinet Office said on Monday, primarily due to new data dragging down capital spending figures, though economists said the change is not enough to sway the central bank.

"This is coming from a government that already seems to be looking for ways to try to promote economic growth, the earthquake, in my view, would be somewhat inflationary, which is the issue that they've been trying to control," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"Knowing that an earthquake occurs, that's just going to fan that same concern."

Markets are pricing in a 78.5% chance of a 25 basis point hike by the BOJ, according to LSEG data.

FED EXPECTED TO CUT INTEREST RATES

The yield on the benchmark U.S. 10-year Treasury note rose 3.1 basis points to 4.17% after reaching 4.192%, its highest level since September 26 and was on track for a third straight session of gains.

The yield on the 30-year bond gained 2.1 basis points to 4.813%, after rising to 4.835%, its highest since September 5.

Market participants were also awaiting a U.S. central bank policy decision on Wednesday. Expectations that the Fed will cut its policy rate by 25 basis points stand at 89.4%, according to CME Group's FedWatch Tool. Markets were pricing in less than a 30% chance of a cut until comments from Fed officials in recent weeks spurred a reversal in expectations.

"We anticipate that the rate cut will take place, but there seems to be disagreement within the Fed regarding both the current economic outlook and the appropriate pace of future easing. The market could be reacting to thinking that there's the potential for too much easing, which would reaccelerate inflation," said JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management in Chicago.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 58.7 basis points.

An auction of $58 billion in three-year notes on Monday was seen as solid by analysts, with demand of 2.64 times the notes on sale. More supply will come to the market this week as Treasury auctions $39 billion in 10-year notes on Tuesday and $22 billion in 30-year bonds on Thursday.

The two-year U.S. Treasury yield, which typically moves in step with Fed interest rate expectations, advanced 1.7 basis points to 3.581% after touching 3.61%, its highest level since November 20.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.327% after closing at 2.342% on Friday.

The 10-year TIPS breakeven rate was last at 2.263%, indicating the market sees inflation averaging about 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Paul Simao and Daniel Wallis)