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Minneapolis Fed's Kashkari suggests potential rate cuts

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Weak auction of 10-year notes pushes yields higher

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Trump to nominate Fed Board member by week's end

(Updates to afternoon trading)

By Chuck Mikolajczak

NEW YORK, Aug 6 (Reuters) - Longer-dated U.S. Treasury

yields were higher on Wednesday, after a weak auction of 10-year

notes by the Treasury, while the market awaits President Donald

Trump's choice to fill a slot on the Federal Reserve's Board of

Governors.

Yields extended their gains after a $42 billion auction in

10-year notes was seen as soft by analysts, with demand at 2.35

times the notes on sale the weakest in a year. Primary dealers

took 16.2% of the sale, the highest percentage in a year and

indicative of slack demand, according to Lou Brien, strategist

at DRW Trading in Chicago.

The sale follows a somewhat disappointing auction of $58 billion

in three-year notes on Tuesday and comes ahead of a

$25 billion auction of 30-year bonds on Thursday.

"It was another kind of poorly subscribed auction ... between

record size and relatively expensive rates for the type of

environment we're in, it wasn't very conducive to good sales

this week," said Kim Rupert, managing director, global fixed

income at Action Economics in San Francisco.

"And the market is still trying to digest the employment

report, and then the ISM services yesterday, all of the Fed

goings on, so I think investors were just a little bit more

hesitant to take down this paper."

Prior to the auction, yields briefly spiked, with the 10-year

yield hitting a session high of 4.283% and coincided with a

sharp move lower in Treasury futures, which Rupert said

could have been due to hedging in case of a poor auction or

someone trying to "cheapen up" the market heading into the

sale.

Yields have been moving lower in recent sessions, including

a steep drop on Friday, following a weak government payrolls

report and an announcement from the Fed that Governor Adriana

Kugler was resigning early, which bolstered market expectations

for a rate cut from the central bank at its September meeting.

Data on Tuesday, however, from the Institute for Supply

Management showed a slowing in the services sector and indicated

price pressures had increased. That helped to cool expectations

for a cut and sent yields on shorter-dated yields higher.

The yield on the benchmark U.S. 10-year Treasury note

rose 2.8 basis points to 4.224% and was poised to

snap a four-session streak of declines.

Trump said on Tuesday he will decide on a nominee to fill

Kugler's vacancy, after she leaves on Friday, by the end of the

week.

The yield on the 30-year bond climbed 4.4

basis points to 4.813%.

Minneapolis Fed President Neel Kashkari said on Wednesday the

Fed may need to cut rates in the near term to account for a

slowing economy, although it remains unclear how long it will

take for the effect of tariffs to become apparent.

Federal Reserve Governor Lisa Cook said that the moderation in

the pace of hiring in Friday's employment data was "concerning,"

while Boston Fed President Susan Collins said uncertainty leads

to a "wait and see" approach to price setting.

A part of the U.S. Treasury yield curve measuring the gap

between yields on two- and 10-year Treasury notes

that market participants monitor as an indicator of economic

expectations, was at a positive 51.7 basis points after hitting

a 2-1/2 week high of 54.9 on Monday.

The two-year U.S. Treasury yield, which

typically moves in step with interest rate expectations for the

Fed, shed 0.8 basis point to 3.708%.

Market expectations for a September rate cut of at least 25

basis points from the Fed stood at 95.2%, up from the 92.9% in

the prior session and well above the 46.7% from a week ago,

according to CME's FedWatch Tool.