TREASURIES-Yields supported by NY state data in subdued trade

Updates prices for late morning trade, adds San Francisco Fed comment in paragraph 7

By Alden Bentley

NEW YORK, Feb 18 (Reuters) - U.S. Treasury yields crept higher on Tuesday as investors returned from a holiday weekend, digesting last week's market swings and another piece of data showing growth remains strong enough to complicate the Federal Reserve's easing path.

The yield on the benchmark 10-year Treasury note briefly dipped then moved higher after the New York Fed's February Empire State business conditions index came in at a stronger-than-expected 5.7, versus -12.6 in January. The two-year yield barely budged.

Lou Brien, market strategist at DRW Trading in Chicago, said the report supported the idea that the economy was in even better shape than when the Fed met in January to leave the policy rate at 4.25%-4.50%, after bringing it down a percentage point since September.

"On a holiday week like this when volumes might be a little light, sometimes lesser data can move the market a little bit more than usual," Brien said. He added that Wednesday's release of the Federal Open Market Committee meeting minutes for January could give the market an interesting juxtaposition between how the economy looked then and subsequently.

But it's a pretty light week on the events calendar. The Treasury International Capital System (TICS) report showing foreign Treasuries holdings comes out later Tuesday, with a 20-year bond auction on Wednesday. S&P Global releases manufacturing and services PMIs on Friday.

The fed funds futures 0#FF: term structure shows traders expect the Fed to stand pat until at least July before it eases another 25 basis point, with another cut not coming until perhaps January, according to LSEG calculations.

BUMPY PROGRESS

San Francisco Fed President Mary Daly said on Tuesday that while there was no reason to be discouraged about the bumpy and sometimes imperceptible progress toward the 2% inflation target, the U.S. central bank should keep short-term borrowing costs where they are until the progress is more visible.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was up 4.3 basis points from late Friday at 4.519%.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, was 2.3 bps higher at 4.282%.

The yield on the 30-year bond US30YT=TWEB rose 4.5 basis points to 4.741%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 23.5 bps, steeper than 21.3 bps late Friday.

Treasuries seesawed last week, with the 10-year yield rising to 4.66%, its highest in nearly three weeks, on Wednesday off a hot January Consumer Price Index report. It then tumbled through Friday as PPI and retail sales data indicated inflation was less worrisome and the consumer less active than expected.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.663% after closing at 2.651% on February 14.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.451%, indicating the market sees inflation averaging under 2.5% a year for the next decade.