(Updated in New York afternoon time)

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Yields rise as investors consider Fed policy

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US retail sales increased solidly in July

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European government bond selloff dragging longer-dated US

yields

higher

By Karen Brettell

Aug 15 (Reuters) - U.S. Treasury yields rose on Friday

and 10-year yields hit a two-week high as traders cut bets that

the Federal Reserve will make a larger-than-usual interest rate

cut next month, and as they were dragged higher by increases in

European government bond yields.

The Fed is seen as being almost certain to cut rates in

September as the labor market and other economic indicators

point to a slowing economy. So far tariffs have not passed

through to consumer price inflation, which boosts the chances of

a cut next month.

Hotter-than-expected producer price inflation on Thursday,

however, tempered expectations that the U.S. central bank will

undertake a larger-than-typical 50 basis points move.

"The way it feeds into core PCE (Personal Consumption

Expenditures), you're going to see it coming up a little bit

firmer. So the levels are not as attractive to justify an

outsized cut," said Jan Nevruzi, U.S. rates strategist at TD

Securities.

Fed Chair Jerome Powell has expressed reluctance to cut

rates as he anticipates U.S. President Donald Trump's tariff

policies will increase inflation this summer.

Investors will focus on whether Powell pushes back against

market pricing of rate cuts at the U.S. central bank's annual

economic policy symposium in Jackson Hole, Wyoming, next week.

"The yield curve keeps steepening. I think that's a function

of the Fed rate cuts that are coming in September," said Tom di

Galoma, managing director at Mischler Financial Group. "I don't

think they're going to do 50 in September. I think 25 is

probably more logical at this point, just given the fact that

Powell seems to be reluctant to go at all."

Chicago Fed President Austan Goolsbee on Friday left the door

open to supporting an interest-rate cut in September should

fresh data prove reassuring, but said recent reports showing a

rise in services inflation give him some pause amid what he

calls the "stagflationary" impulse from tariffs.

Data on Friday showed U.S. retail sales increased solidly in

July, boosted by strong demand for motor vehicles as well as

promotions by Amazon and Walmart.

The 2-year note yield, which typically moves in

step with Fed interest rate expectations, was last up 2 basis

points on the day at 3.759%.

The yield on benchmark U.S. 10-year notes rose

3.5 basis points to 4.328%.

The yield curve between two-year and 10-year notes

steepened by around 2 basis points to 56.7 basis

points and earlier reached 57.6 basis points, the steepest since

July 16.

Longer-dated yields are being pulled higher in line with

increases in European government debt yields.

"Curves keep steepening there and they just keep selling

off," di Galoma said.

German 10-year yields reached 2.793% on Friday,

the highest since March 26. German 30-year yields

reached 3.361%, the highest since 2011.

"It's more of a global phenomenon where the long end is

under pressure," Nevruzi said.

Analysts at ING said on Friday that implied volatility

increases in the very long end of the euro swap curve are likely

due to an upcoming Dutch pension transition.

"We are seeing this behavior in the US where the fiscal

deficit is worrying investors, but in the euro space the 30Y

swap spread has remained fairly constant the past months. We

therefore see the anticipated Dutch pension funds' rotation away

from longer-dated swaps as a potential driver behind recent

moves," they said.

Traders are also focused on talks to end the Russian war in

Ukraine.

Trump and Russia's Vladimir Putin arrived in Alaska on Friday

for their summit. Trump said he wants to see a ceasefire in the

war in Ukraine "today."