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TREASURIES-Yields higher on improving risk sentiment, before Fed minutes

Karen Brettell

* Risk sentiment improved, reducing bond demand

* Fed to release minutes from July meeting

* Fed's Powell to speak on Friday

NEW YORK, Aug 21 (Reuters) - U.S. Treasury yields rose on Wednesday as rising stock prices reflected improving risk sentiment, and as investors awaited the release of minutes from the Federal Reserves July meeting. Stock markets opened higher as investors cheered upbeat earnings from Lowe's and Target. Italys government debt also steadied as Italian President Sergio Mattarella began two days of talks with parties on Wednesday to seek a way out of a political crisis that will lead to formation of the country's 67th government since World War Two or to early elections. But the Federal Reserve is the prime focus of investors this week, with Wednesdays meeting minutes and a speech by Fed Chairman Jerome Powell on Friday. Bond yields have plunged and a key part of the yield curve has inverted since the U.S. central bank in July cut rates for the first time in a decade, and said that further rate decreases may not be needed. Market participants are now focused on whether there has been any change in Powells stance on future rate cuts, given the increasing disparity between the Fed's outlook on the economy and that of the bond market. The market is still acting as though they are behind the curve, said Lou Brien, a market strategist at DRW Trading in Chicago. Slowing economic growth and expectations that inflation will remain tepid are holding long-dated bond yields near historic lows. The yield curve between two-year and 10-year notes inverted for the first time since 2007 last week, indicating that a recession is likely in one to two years. Interest rate futures traders are pricing in a 98% probability of a rate cut at the Feds September meeting, a 78% chance of an additional cut in October, and a 49% likelihood of another cut in December, according to the CME Groups FedWatch tool.

Benchmark 10-year notes were last down 9/32 in

price to yield 1.589%, up from 1.559% late on Tuesday.

The two-year, 10-year yield curve was steady

at 4 basis points.

(Editing by David Gregorio)