US yields little changed after auction as data eyed

(Updated at 2:28 p.m. ET/1828 GMT)

By Chuck Mikolajczak

NEW YORK, Aug 28 (Reuters) - U.S. Treasury yields were barely higher on Wednesday after an auction was well received by the market and investors turned toward data on economic growth and inflation later in the week to gauge the path of interest rate decisions by the Federal Reserve.

Investors have completely priced in a rate cut from the Fed of at least 25 basis points at its mid-September policy meeting, with expectations for a 50-bps cut at 36.5%, up from 11.3% a month ago, according to CME's FedWatch Tool.

Yields have been declining as economic data has signaled a softening economy and inflation has resumed cooling, leading Fed Chair Jerome Powell to signal last week a shift in the central bank's focus to supporting the labor market over combating inflation.

"A lot of people are just kind of waiting for the September meeting," said Tom di Galoma, managing director and head of fixed income at Curvature Securities in Park City, Utah.

"The Fed is certainly ready to cut rates, I'm looking for 50 basis points in September. I'm probably an outlier, but the Fed probably wants to make the first move a substantial one, they want to probably get the economy going a little bit."

Yields saw little reaction, only moving slightly higher, to an auction of five-year notes that was solid, with demand for the notes at 2.41 times the notes on sale. The yield was last up 0.7 bp to 3.664%.

The five-year auction follows a strong two-year note auction of $69 billion on Tuesday, with more supply coming on Thursday in the form of $44 billion in seven-year notes.

Data due on Thursday includes the second reading of economic growth in the preliminary report on second quarter gross domestic product. On Friday, the July personal consumption expenditures data will indicate whether inflation continues to cool.

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 negative 2.9 basis points after narrowing to a negative 2.6 bps, its highest level since Aug. 8.

The narrower inversion suggested that the bond market is pricing in the Fed's easing cycle.

The yield on the benchmark U.S. 10-year Treasury note rose 1.1 basis points to 3.844%. The yield on the 30-year bond edged up 0.4 basis point to 4.132%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 0.6 basis point to 3.871%.

The break-even rate on five-year U.S. Treasury Inflation-Protected Securities was last at 2.041% after closing at 2.042% on Aug. 27.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.042%, unchanged from the close on Aug. 27.

The 10-year TIPS breakeven rate was last at 2.153%, indicating the market sees inflation averaging about 2.2% a year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Rod Nickel and Jonathan Oatis)