*

U.S. two-year yield has largest quarterly fall since Jan

2020

*

U.S. two-year yields rise to two-week peak

*

U.S. 10-year yields post biggest quarterly decline since

October

*

Fed's Powell says no preset course for monetary policy

*

U.S. rate futures price in higher odds of 25-bp cut in

November

(Recasts; adds analyst comment, graphics, quarterly milestones,

Fed's Powell's comments, bullets, byline; updates prices)

By Gertrude Chavez-Dreyfuss and Alden Bentley

NEW YORK, Sept 30 (Reuters) - U.S. Treasury yields rose

across the board on Monday after Federal Reserve Chair Jerome

Powell suggested the central bank will take a gradual approach

in cutting interest rates, noting monetary policy is not on any

"preset course."

The U.S. two-year yield, the most sensitive to Fed rate

move expectations, hit a two-week peak of 3.672%

following Powell's comments. It was last up 8.2 bps at 3.645%,

on pace for its largest daily gain since mid-August.

It was a different story for the third quarter however.

The two-year yield has fallen 107 bps, it worst quarterly

decline since January 2020.

In remarks prepared for delivery at a National

Association for Business Economics conference in Nashville,

Tennessee, Powell said "if the economy evolves broadly as

expected, policy will

move over time

toward a more neutral stance."

He added the "risks are two-sided, and we will continue

to make our decisions meeting by meeting."

The Fed chair also sees two more interest rate cuts,

totaling 50 basis points, this year as a baseline "if the

economy performs as expected," though the Fed could cut faster

if needed, or slower.

Powell's comments raised the odds for the smaller 25

basis-point cut at the November meeting to 62% and about 38% for

50 bps, according to LSEG estimates. It was a toss-up before

Powell's remarks. For 2024, the rate futures have priced in

about 73 bps in cuts, down from roughly 80 bps on Friday.

"Powell is trying to temper things a little bit. It's

probably the right thing to do," said Greg Faranello, head of

U.S. rates strategy at AmeriVet Securities in New York.

"If you listened to Fed speak since their meeting, they

have definitely leaned more toward a gradual course lower ...

the economy has weakened a little bit here and there, but there

are still pockets that have done well."

The benchmark 10-year yield gained 3.9 bps to 3.790%

. For the third quarter, the 10-year yield has

dropped 55 bps, the worst quarterly fall since October 2023.

U.S. 30-year yields, meanwhile, advanced 2.7 bps to

4.124%. They sank 38 bps in the third quarter for

the worst quarterly showing since October last year as well.

The Treasury yield curve flattened following Powell's

remarks, with the spread between two-year and 10-year yields

hitting positive 13 bps, the tightest spread in

10 days. It was last at 14.3 bps.

The curve is described as a bear flattener, in which

short-term rates are rising faster than longer-dated maturities.

This reflects expectations the Fed could take its time cutting

interest rates, and that pushes yields on the front end higher.

Other Fed speakers on Monday were a little more dovish.

Atlanta Fed President Raphael Bostic, a voter at this

year's Federal Open Market Committee, said he would be

open to another 50-bp rate cut

at the U.S. central bank's meeting in November if upcoming

data show job growth slowing faster than expected.

Chicago Fed President Austan Goolsbee, who will be a

voter on the FOMC next year, reiterated on Monday he sees a case

for

extensive

U.S. central bank interest rate cuts given the current

state of the economy and where it is likely to go.

The bond market is also bracing for a slew of economic

data this week, culminating in Friday's September payrolls

report. The employment side of the Fed's dual mandate has taken

on more importance in the last two months or so as inflation

cooled.

Tuesday brings the August JOLTS job openings release and on

Thursday ADP national employment data and weekly jobless claims

will set the stage for the main employment news Friday.

"We definitely switched off on inflation and we're

uber-focused on jobs," said Subadra Rajappa, head of U.S. rates

strategy at Societe Generale in New York.