On July 3, 1999 Watson signed with the New York Yankees. Watson was used as a reliever during his time with the Yankees, and had his best tenure with them, going 4–0 with a 2.10 ERA to finish the 1999 season. His play earned him a spot on the postseason roster, where he pitched one inning in the 1999 American League Championship Series against the Red Sox. Watson gave up two hits, two walks, and one strikeout as the Yankees defeated Boston. Watson did not pitch in the 1999 World Series, but earned a ring regardless. On November 5, 1999, he was granted free agency, but he re-signed with the Yankees on December 7.