(Corrects nature of repurchase operation in seventh paragraph) * Fed expected to cut rates on Wednesday * Soaring repo costs show stress in funding markets * Higher oil prices, Iran tension boosts safety buying By Karen Brettell NEW YORK, Sept 17 (Reuters) - U.S. Treasury yields fell on Tuesday, ahead of an expected interest rate cut by the Federal Reserve at the conclusion of its two-day policy meeting on Wednesday. While a rate cut is seen as near-certain this month, there are deep disagreements among Fed policymakers on whether it or further decreases are warranted. Investors will focus on the so-called “dot plot,” which shows where policymakers expect rates to be in the future. “The dot plot will be interesting. I would expect to see a lot more dispersion between all the dots going forward especially as we know there are a lot of contrasting views at the Fed right now,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. The U.S. central bank will also be expected to address stress in the U.S. funding markets. The cost for banks and Wall Street dealers to borrow dollars in the overnight repurchase agreement market rose as high as 10% on Tuesday, well above the Fed’s target range of 2.00%-2.25%. It then fell to zero after the New York Federal Reserve said it would conduct a repurchase operation in a bid to lower the funding costs. “The Fed’s going to have to in some way address what’s going on in the funding markets,” Lederer said. Safe-haven U.S. debt was also bid on concern that an attack on Saudi Arabian crude oil facilities could lead to further spikes in oil costs, weighing on the economy, and potentially spur a war between the United States and Iran. U.S. President Donald Trump said on Monday that it looked like Iran was behind the weekend strike on the Saudi facilities, which cut 5% of global production, but stressed he did not want to go to war. Iran denied it was to blame. Benchmark 10-year notes were last up 5/32 in price to yield 1.828%, down from 1.843% on Monday. The notes briefly gave up price gains after Reuters reported that Saudi Arabia's oil output will be fully restored quicker than thought, taking two or three weeks not months as initial indications suggested. Data on Tuesday showed that U.S. manufacturing output increased more than expected in August, boosted by a surge in machinery and primary metals production. (Editing by Bernadette Baum) )