TREASURIES-Yields supported by NY state data in subdued trade

Updates to New York afternoon

By Alden Bentley and Karen Brettell

NEW YORK, Feb 18 (Reuters) - U.S. Treasury yields rose on Tuesday as investors returned from the Presidents Day 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 benchmark 10-year Treasury note yield briefly dipped, then rose 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.

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 and left 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.

Other data on Tuesday showed U.S. homebuilder sentiment tumbled to a five-month low in February on worries that tariffs on imports would combine with higher mortgage rates to further drive up housing costs.

Brien 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 the events calendar is light. The Treasury International Capital System (TICS) report on foreign Treasury holdings on Tuesday showed Japan and China both cut their holdings in December. The Treasury Department will auction $16 billion in 20-year bonds on Wednesday and $9 billion in 30-year Treasury Inflation-Protected Securities on Thursday. 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 points, with another cut not coming until perhaps January, according to LSEG calculations.

The benchmark U.S. 10-year Treasury note yield US10YT=TWEB was up 6.7 basis points on the day at 4.543%.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations,

was 3.6 basis points higher at 4.295%.

The 30-year bond yield US30YT=TWEB rose 6.7 basis points to 4.7627%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 24.5 bps, steeper than 21.3 bps late Friday.

Investors are also watching progress in U.S.-Russia peace talks on ending the war in Ukraine after an initial meeting that excluded Kyiv.

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 U.S. central bank's 2% inflation target, the Fed should keep short-term borrowing costs where they are until progress is more visible.

Fed Governor Christopher Waller also said on Monday he agrees policy should remain on hold until inflation falls again. That may only be a matter of time, he said, noting that a recent "disappointing" rise in the Consumer Price Index may reflect seasonal issues, not rising price pressures.

He said his "baseline" view is that the Trump administration's new tariffs will have only a modest impact on prices that the Fed should try to look through in setting monetary policy.

Treasuries seesawed last week, with the 10-year yield rising on Wednesday to 4.66%, its highest in nearly three weeks, 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 was less active than expected.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.672% after closing at 2.651% on February 14.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.457%, indicating the market sees inflation averaging under 2.5% a year for the next decade.