REFILE-TREASURIES-US yields tumble amid policy uncertainty, signs of US deceleration

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By Tatiana Bautzer

NEW YORK, Feb 25 (Reuters) - U.S. Treasury yields dropped on Tuesday, with the benchmark 10-year yield hitting its lowest in 10 weeks, as investors sought a refuge in bonds from signs of deceleration in the U.S. economy and persistent geopolitical uncertainty.

Yields accelerated their fall after the U.S. consumer confidence index declined to 98.3 in February, the lowest reading since June. Meanwhile the tech-heavy Nasdaq led Wall Street declines on Tuesday, hitting a six-week low. .N

U.S. single-family house prices increased in December, another blow to affordability alongside elevated mortgage costs, even as the housing supply increases.

Aside from growing signs of a slowdown, investors worried about U.S. President Donald Trump's economic policies after he said proposed tariffs on Mexico and Canada were still set to start next week.

"We are beginning to see some cracks in the markets regarding the economic outlook and anxiety about some of the conflicting policies", said Robert Tipp, head of global bonds at PGIM Fixed Income.

The bond market as a result is betting on more rate cuts by the Federal Reserve this year, compared to a few weeks ago. On Tuesday, U.S. rate futures priced in 61 basis points (bps) of easing in 2025, compared with 44 bps late on Monday, according to LSEG calculations.

Futures also showed that markets are expecting the first rate cut to come in June rather than July. The higher odds for a second cut also moved to September and October.

In late morning trading, the yield on the U.S. 10-year Treasury note US10YT=TWEB was down 9.1 bps to 4.304%, after earlier sliding to the lowest since December 12. The yield on the 30-year bond US30YT=TWEB declined 8.4 bps to 4.564%.

U.S. two-year yields dropped 7.8 bps to 4.09%, after earlier dropping to 4.07%, the lowest since November 1.

A sharp drop in business activity reported last week may be interpreted as an opportunity for interest rate cuts. But investors are still far from seeing a change in longer-term trends for the U.S. deficit and debt.

Markets are still skeptical of the real effects on the deficit of spending cuts by Elon Musk's Department of Government Efficiency, known as DOGE. A significant deficit reduction "will require more legislative progress on spending cuts", Tipp said. Substantive budget changes would require congressional approval.

Later on Tuesday, the U.S. Treasury will sell $70 billion in five-year notes, a day after a strong two-year note auction on Monday.