TREASURIES-Yields fall as data weakens, rate cut bets ramp up

Updated in New York afternoon time

By Karen Brettell

NEW YORK, Feb 21 (Reuters) - Benchmark 10-year U.S. Treasury yields fell to a two-week low on Friday after several data releases pointed to slowing growth, leading traders to increase bets that the Federal Reserve will cut rates two times this year.

U.S. business activity nearly stalled in February amid mounting fears over tariffs on imports and deep cuts in federal government spending.

The tumble in activity to a 17-month low reported by S&P Global was the latest in a string of surveys to suggest that businesses and consumers were becoming increasingly rattled by the Trump administration's policies.

Other data on Friday showed that U.S. consumer sentiment dropped more than expected in February to a 15-month low and inflation expectations rocketed. Separately, U.S. existing home sales dropped more than expected in January.

"It's a softening across the board," said John Luke Tyner, portfolio manager and fixed-income analyst at Aptus Capital Advisors in Fairhope, Alabama.

The weakening data along with other factors including expected improvement in shelter price inflation and the Federal Reserve's willingness to look through a one-time price increase from tariffs, mean that the market is underpricing the likelihood of more rate cuts, Tyner added.

Benchmark 10-year note yields US10YT=RR were last down 8.3 basis points on the day at 4.416%, and earlier reached 4.406%, the lowest since February 5.

Two-year yields US2YT=RR fell 7.6 basis points to 4.19%, the lowest since February 6.

The yield curve between two-year and 10-year notes US2US10=TWEB flattened by around one basis point to 22.2 basis points.

Fed funds futures traders are now pricing in 48 basis points of cuts by year end, up from around 42 basis points earlier on Friday and 36 basis points earlier this week. That indicates rising expectations that the Fed will make a second 25-basis point cut this year.

Traders remain focused on plans by U.S. President Donald Trump’s administration to implement tariffs on trading partners, though market volatility around tariff announcements has died down as they wait on details on what levies exactly will go into place.

Trump said on Wednesday he will announce fresh tariffs over the next month or sooner, adding lumber and forest products to previously announced plans to impose duties on imported cars, semiconductors and pharmaceuticals.

The next major U.S. economic release will be the personal consumption expenditures price index for January due next Friday, which is the Fed’s preferred inflation indicator and may give new clues about when the U.S. central bank may resume rate cuts.

Fed officials have expressed concern about inflation remaining above their 2% annual target. January’s consumer price index was hotter than expected, raising fears that inflation may be reaccelerating, though components in January’s producer price inflation report pointed to milder price pressures.

Yields had also dipped earlier on Friday in line with Japanese government bond yields after Bank of Japan Governor Kazuo Ueda said the central bank stands ready to ramp up government bond buying if long-term interest rates rise sharply.

“While that's not directly about the U.S. markets, global bond markets trade to some degree in sync and so I think we're seeing a little bit of a positive response to that,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.

Investors were also comforted by remarks by U.S. Treasury Secretary Scott Bessent on Thursday that longer-dated bond supply is unlikely to rise anytime soon.

Minutes from the Federal Reserve’s January meeting on Wednesday also showed that policymakers discussed pausing or tapering its quantitative tightening program, which could reduce the amount of debt the Treasury needs to issue.

The Treasury will sell $183 billion in short- and intermediate-dated debt next week, including $69 billion in two-year notes, $70 billion in five-year notes and $44 billion in seven-year notes.