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U.S. 10-year yields hit new 10-week high

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U.S. two-year yields pull back from seven-week peaks

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U.S. yield curve steepens

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U.S. three-year note auction shows lackluster results

(Adds comment, bullets, U.S. three-year note auction results,

updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 8 (Reuters) -

U.S. Treasury yields were mixed on Tuesday in choppy trading

as short-term rates fell, while those on the long end inched

higher on factors such as Federal Reserve monetary policy,

investor positioning, and economic outlooks affecting market

moves.

Shorter-dated yields fell further after the U.S.

Treasury's three-year note auction ended up weaker than

expected. Some investors had expected higher demand given how

much the note had sold off, pushing yields lower, in the last

few sessions after a successful sale last month.

Investors continued to recast expectations about the

Fed's ongoing easing policy and awaited minutes of the central

bank's September meeting for more clarity on what prompted a

jumbo rate cut while the economy remained resilient. The minutes

are scheduled to be released on Wednesday.

The U.S. rate futures market has priced in an 88%

probability of a 25 basis-point (bp) rate cut at next month's

meeting, and a 12% chance that the Fed could pause. Before

Friday's blockbuster September jobs report that shifted the

market's thinking, rate futures had implied a 50% chance the Fed

would go for the bigger rate cut of 50 bps, with the other half

betting on 25 bps.

Investors also said that for most of the year, the market

had factored in a sizable number of rate cuts over the next two

years, and a pullback from those expectations was seen as

overdue.

"The economic numbers that we have gotten of late

culminating in last Friday's jobs report didn't validate the

rally we saw in Treasuries over the summer," said Kevin

Flanagan, head of fixed income strategy, at WisdomTree in New

York.

"The actual reaction is this correction in the market.

You have moves like this: 40-50 basis points in a matter of

weeks. Often times, what you see are long positions start to get

liquidated. So it feeds into this sell-off and it works the

other way too on the shorts side."

In afternoon trading, the benchmark 10-year yield was

marginally higher at 4.028%, advancing for a fifth

straight session and hitting a fresh 10-week high of 4.057%.

U.S. 30-year yields also hit their highest since late July

at 4.342% and were last up 1.5 bps at 4.319%.

On the short-end of the curve, U.S. two-year yields pulled

back from seven-week peaks hit on Monday, to trade 4 bps lower

at 3.965%.

Post-auction, U.S. three-year yields fell 2.7 bps to 3.876%

, sliding after the auction's yield came in at 3.878%,

higher than the forecast at the bid deadline. This suggested

that investors demanded a premium to take the three-year note.

The bid-to-cover ratio, a gauge of investor appetite,

was 2.45, the lowest since June.

The yield curve steepened, with the spread between the

two-year and the 10-year yield at positive 5.6 bps

, from 2.9 bps late on Monday.

The curve briefly inverted on Monday as market participants

reduced expectations of an aggressive rate-cutting cycle.

Fed speakers on Tuesday did not provide much insight on the

path of interest rates, other than to say that they are headed

lower. Atlanta Federal Reserve President Raphael Bostic said

while the labor market has slowed, it is "not slow", calling the

monthly jobs creation "pretty robust."

However, Fed Governor Adriana Kugler said she strongly

supported the U.S. central bank's recent rate cut and

would support further reductions

if inflation continues to ease as she expects.