TREASURIES-US yields steady as investors eye tax cuts, wait for inflation data

By Tatiana Bautzer

NEW YORK, Feb 26 (Reuters) - U.S. Treasury yields were steady on Wednesday, following steep declines in the previous session, after the House approved an extension of tax cuts on the new budget and investors waited on inflation data expected for Friday.

There was little reaction to data showing new home sales plunged 10.5% to a seasonally adjusted annual rate of 657,000 units last month, likely due to unseasonably cold weather.

Higher risk appetite with gains in U.S. stocks also contributed to the stability in Treasury yields.

In late morning trading, the yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was flat at 4.3%, while 30-year bond yields US30YT=TWEB fell 1.2 basis points (bps) to 4.544%.

The two-year US2YT=TWEB U.S. Treasury yield, which typically tracks interest rate expectations, rose 2.5 bps to 4.121, after reaching a more than three-month low on Tuesday.

The House passed late on Tuesday a version of the budget to advance the Trump administration's $4.5 trillion tax-cut plan. The plan calls for spending cuts, but their size and effect on the deficit are still unclear.

Investors viewed the news as initially bearish on Treasuries, with five and 10-year yields rising in late trading on Tuesday.

"The bond market is still more prone to rallying, as the scenario with potential interest rate cuts later in the year has not changed," said Ralph Axel, interest rates strategist at BoFA Securities. Axel cites swap rates that reflect the market expectations of a 60-bp rate reduction in 2025.

According to the CME's FedWatch tool, the highest odds for the first 25-bp rate cut are in June's Fed meeting, with a 52% probability. On Wednesday, the highest probability for a second rate cut was in the October meeting.

The discussions on the budget and future size of the deficit have begun in Congress, but it is still early to gauge if there is the possibility of reduction, said Padraic Garvey, ING's head of global rates and debt strategy.

Treasury secretary Scott Bessent said on Tuesday President Donald Trump's economic agenda would help bring down interest rates, particularly on the benchmark 10-year Treasury note, by restoring market confidence in the long-term U.S. fiscal profile.

Garvey said so far there are no big effects of the savings of the Department of Government Efficiency, known as DOGE, on spending. So far this year, spending is 25% higher than in the same period a year earlier, he said.

"What is clear now is that the 2017 tax cuts will probably be extended, so to reduce the deficit Congress needs to reduce spending". It is still early to gauge the real chance of a deficit reduction, he added.

Investors said one key element to define Treasury yields over the near term will be the U.S. Personal Consumption Expenditure (PCE) inflation rate, the Federal Reserve's preferred inflation gauge, to be released on Friday.

Later on Wednesday, the Treasury is expected to auction $44 billion in 7-year notes.