NEW YORK, Aug 27 (Reuters) - U.S. Treasury yields rose

on Tuesday, as investors assessed the likelihood that the U.S.

economy will be able to avoid a recession and awaited a two-year

note auction for signs of investor demand.

The closely watched gap between yields on two- and 10-year

Treasury notes, considered a gauge of growth

expectations, reduced its inversion to the narrowest gap in

three weeks. It was last at minus-8.7 basis points versus

minus-12.4 bps late on Monday.

The narrower inversion suggested that the bond market is

pricing in the Federal Reserve's easing cycle, which is likely

to start next month.

Investors digested the day's economic data, with 10-year

yields dipping briefly after data showing U.S. single-family

home prices fell in June, leading to the smallest annual

increase in nearly a year.

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

was last up 2.4 bps at 3.844%. The yield on the

30-year bond rose 3.2 bps to 4.139%.

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

moves in step with interest-rate expectations,

was flat at 3.928%.

A separate report showed U.S. consumer confidence rose in

August, but that Americans are becoming more anxious about the

labor market.

The two-year note auction is scheduled for 1 p.m. ET.

Investors have been trying to gauge how aggressive the Fed

may be in cutting interest rates to avoid a recession.

"The question is how slow is the economy slowing. That's

going to determine how fast the Fed is going to ease," said Stan

Shipley, fixed income strategist at Evercore ISI in New York.

"Generally over the last two weeks or so the odds of a 50

(bps cut) have climbed higher. As a consequence, the Treasury

market and other sovereign yields are saying if central banks

are easing faster, the odds of a recession are going to be going

down."

Yields dropped last week after the Fed signaled in Jackson

Hole, Wyoming, that it was ready to cut rates.

Fed Chair Jerome Powell indicated an imminent start to a

rate cut from the central bank, noting a further cooling in the

labor market would be unwelcome while signaling confidence

inflation is within reach of its 2% target.

Traders were last betting on either a 25-basis point or a

50-basis point interest-rate cut in September. Odds of a 25-bps

cut stand at about 71%, while odds of a 50-bps cut are at about

29%, according to CME Group's Fed Watch tool.