TREASURIES-US yields steady as economic optimism improves

By Karen Brettell

March 18 (Reuters) - Longer-dated U.S. Treasury yields were steady on Tuesday after earlier rising on optimism that the outlook for the U.S. economy may not be as bad as recently feared, though concerns about the impact of trade tariffs kept investors cautious.

"Sentiment seemed to hit kind of a big negative trough," said Thomas Simons, chief U.S. economist at Jefferies in New York. However, "the data so far suggests that most of the weakness that we saw in January was a combination of bad weather and kind of a reflexive pause after a strong Q4 for a lot of things… incrementally it's been not as bad as it was over the last two weeks or so."

Data on Tuesday showed that U.S. single-family homebuilding rebounded sharply in February while U.S. manufacturing production increased more than expected in February.

U.S. retail sales also rebounded in February, a report on Monday showed.

Stock markets have also recovered from a sharp selloff as sentiment improves, which has reduced demand for Treasuries. The S&P 500 last week dropped 10% from its record high close on February 19, confirming that it is in a correction.

The yield on benchmark U.S. 10-year notes US10YT=RR was last down 0.2 basis points on the day at 4.304%. It has risen from a four-month low of 4.106% reached on March 4.

The two-year note US2YT=RR yield, which typically moves in step with interest rate expectations for the Federal Reserve, fell 1.1 basis points to 4.042%. It is up from 3.829% on March 11, which was the lowest since October 4.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened by around one basis point to 26 basis points.

Investors are concerned that tariffs will slow the U.S. economy and increase inflation, while large layoffs by the federal government are expected to lead to higher unemployment.

So far, however, the labor market has remained relatively healthy.

Investors will focus on updated economic and interest rate projections by Federal Reserve policymakers at the conclusion of the U.S. central bank's meeting on Wednesday for any signs that they see a worsening economic picture, and potentially more rate cuts this year.

Interest rate futures traders see the Fed as most likely to resume interest rate cuts in June. The Fed is widely expected to leave rates unchanged this week.

A recent increase in European government debt yields have also been weighing on the U.S. markets and pulling U.S. yields higher.

Germany's lower house of parliament is set to vote on Tuesday on a massive surge in borrowing that could boost Europe's largest economy and stimulate growth across the region.

The U.S. Treasury will sell $13 billion in 20-year bonds on Tuesday, and $18 billion 10-year Treasury Inflation-Protected Securities on Thursday.