(Updated at 1110 EDT)

By Karen Brettell

NEW YORK, Sept 4 (Reuters) - Treasury yields fell on

Wednesday and the closely watched yield curve between two-year

and 10-year notes turned positive after data showed that U.S.

job openings dropped to a 3-1/2-year low in July.

The data comes before Friday's jobs report for August, which

may be key as to whether the Federal Reserve's expected interest

rate cut at its Sept. 17-18 meeting will be by 25 or 50 basis

points.

"The big event of the week comes in the form of Friday's

payrolls print," said Ian Lyngen, head of U.S. rates strategy at

BMO Capital Markets in New York.

"That's to a large extent going to give us the road map for

what to expect from the Fed. The employment data is now

overshadowing inflation as the biggest risk to near-term policy

expectations," he said.

Investors are closely watching jobs data for any signs that

the U.S. economy is likely to tip into recession.

Wednesday's move in the 2/10 yield curve is a possible

ominous sign in this direction, if it sticks.

The 2/10 part of the yield curve has been mostly inverted

since July 2022. It briefly turned positive on Aug. 5 before

turning negative again.

The inversion, in which longer-dated yields are lower than

shorter-dated ones, is typically viewed as a sign that a

recession is likely within the next 18 months to two years,

though the current inversion has lasted longer than in previous

episodes.

The curve then typically turns positive before an economic

downturn sets in as investors price in expected rate cuts by the

Fed.

Treasury yields fell on Tuesday as stocks tumbled, which was

blamed in part on weak manufacturing data raising concerns about

the growth outlook. Some analysts, however, see the U.S. economy

as likely to slow but avoid a recession.

Friday's employment report is expected to show that

employers added 160,000 jobs during the month, according to the

median estimate of economists' polled by Reuters. The

unemployment rate is anticipated to ease to 4.2%, from 4.3% the

prior month.

Traders are pricing in a 55% chance of a 25 basis point rate

reduction, and a 45% chance of a 50 basis points cut, according

to the CME Group's FedWatch Tool. The Fed is expected to make

further cuts at its November and December meetings.

Interest rate-sensitive two-year note yields were

last down 8.9 basis points on the day at 3.7992%. Benchmark

10-year note yields fell 4.7 basis points to 3.797%.

The yield curve between two- and 10-year yields

was at minus 0.40 basis point after earlier

trading at positive 0.60 basis point.