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Empire State index shows first negative reading since June

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Market fully pricing in rate cut of at least 25 bps

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Fed policy announcement due Wednesday

(Updates to afternoon US trading)

By Chuck Mikolajczak

NEW YORK, Sept 15 - U.S. Treasury yields declined on

Monday, after a gauge of manufacturing activity in New York was

below expectations as investors prepared for the upcoming policy

announcement from the Federal Reserve later this week.

The New York Fed's Empire State index came in at a negative

8.7 for September, its first reading below zero since June and

short of the 5.0 estimate of economists polled by Reuters.

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

fell 2.6 basis points to 4.034% and was on track

for its third decline in four sessions.

Yields have fallen in recent weeks as a spate of economic data

that indicated a softening of the labor market boosted

expectations the Fed will be more aggressive in cutting interest

rates.

"What you might be looking at in this case is a situation of buy

the rumor, sell the facts," said Scott Welch, chief investment

officer at Certuity in Potomac, Maryland.

"In other words, people have been positioning their portfolios

and yields have dropped accordingly in anticipation of a rate

cut. So once it's announced if it's what everybody expected ...

I would be surprised if the long end of the curve continued to

fall and I would not be surprised if in fact the long end of the

curve began to come back up because of inflation fears."

The yield on the 30-year bond shed 2.6 basis

points to 4.653%.

The market is fully pricing in a cut of at least 25 basis points

at the conclusion of its meeting on Wednesday, with a 4% chance

for an outsized 50 basis point cut, according to CME's FedWatch

Tool.

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 49.7 basis points.

President Donald Trump has been critical of Fed Chair Jerome

Powell for not cutting rates more aggressively, while also

attempting to fire Governor Lisa Cook. In addition, the Senate

will hold a vote later on Monday for Trump's board nominee

Stephen Miran.

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

typically moves in step with interest rate expectations for the

Fed, declined 2.3 basis points to 3.535%.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.439% after closing at 2.446% on Friday.

The 10-year TIPS breakeven rate was last at

2.366%, indicating the market sees inflation averaging about

2.4% a year for the next decade.

(Editing by Nick Zieminski and Daniel Wallis)