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

Adds analyst quote, updates yields, includes auction result

By Tatiana Bautzer

NEW YORK, Feb 25 (Reuters) - U.S. Treasury yields dropped sharply 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 uncertainty about the effects of tariffs pursued by President Donald Trump.

Yields accelerated their fall after news that the U.S. consumer confidence index declined to 98.3 in February, the lowest reading since June. Meanwhile the risk off mood that lifted bond prices and knocked yields was also evident on Wall Street, where the tech-heavy Nasdaq led declines on Tuesday, hitting a six-week low. .N

"We are in a correction mode in U.S. equities. If that trend persists there will be wealth destruction. The lower-income consumer is already struggling and that could make wealthy consumers more cautious," said Jack McIntyre, portfolio manager at Brandywine Global Investment management in Pennsylvania.

Consumer confidence deteriorated sharply in February to an eight-month low, with the uncertainty about the policies of Trump's administration contributing to the drop.

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 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.

U.S. two-year yields, which typically move in step with interest rate expectations, dropped 5.8 bps to 4.1%, after reaching earlier 4.07%, the lowest since November 1.

In mid-afternoon trading, the yield on the U.S. 10-year Treasury note US10YT=TWEB was down 8.7 basis points to 4.306%, 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%.

The U.S. Treasury sold $70 billion in five-year notes on Tuesday, with demand equivalent to 2.4 times the offering, a day after a strong two-year note auction. Yields on five-year notes fell 3 basis points after the auction to 4.12%.

A sharp drop in business activity reported last week was seen as the first sign of an economy slowdown.

The Trump administration's promises to reduce government spending so far are the "right talk," said McIntyre, but investors have yet to see a real change in longer-term trends for the U.S. deficit and debt.

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