TREASURIES-US yields rise modestly as markets brace for key inflation data

Adds analyst quote, updates market prices

By Tatiana Bautzer

NEW YORK, Feb 27 (Reuters) - U.S. Treasury 10-year yields rose on Thursday for the first time in seven days ahead of a key inflation report after mixed economic data offset recent downbeat reports that had pushed yields to 2025 lows earlier this week.

Data released on Thursday showed orders for long-lasting manufactured goods rose 3.1% in January, following a downwardly revised 1.8% December drop. Economists polled by Reuters had forecast a 2% rise.

The report is not usually a market mover, but yields ticked higher after it came out alongside data showing no change in the Commerce Department's second estimate of fourth-quarter gross domestic product, which rose to a 2.3% rate. Moreover, initial unemployment claims climbed to 242,000 last week, the largest weekly increase in five months.

U.S. President Donald Trump said on Thursday tariffs on imports from Canada and Mexico may go into effect next week, a day after mentioning a potential initial date in April, declaring a 10% tariff on imports from China.

In late-afternoon trading, the benchmark U.S. 10-year Treasury note yield US10YT=TWEB rose 2.8 bps to 4.283%. The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, was little changed at 4.275%.

On Wednesday the two-year yield fell to its lowest since early November and the 10-year yield dropped to its weakest since December 11.

Weak consumer confidence, manufacturing, retail sales and home sales data in recent weeks fueled a bond rally that has lowered yields. Investors have moved out of stocks into the safety of Treasury markets on worries about how the Trump administration's tariff policies will affect growth and inflation.

On Thursday, the jobless claims numbers rose by the most in five months. Analysts are reviewing the numbers to see if there is any impact on the numbers from the firing of federal workers by the Department of Government Efficiency headed by billionaire Elon Musk.

Bonds recovered slightly as stocks retreated.

The market is awaiting Friday's Personal Consumption Expenditures price index report to see if inflation is more contained than suggested by hotter-than-expected January consumer price data which rattled markets two weeks ago.

The key question is whether the PCE index will be tame enough to allow the Federal Reserve to return to its easing track in coming months after pausing on rate cuts in January.

Traders in Fed funds futures 0#FF: are pricing in 60 bps of easing this year, or two rate cuts of 25 bps each, LSEG calculations show. The Fed is likely to resume cutting rates either at the June or July policy meeting.

"We are seeing 10-year yields lower than fed funds, meaning the Fed may be too hawkish considering the economic conditions," said Lou Brien, market strategist at DRW Trading.

A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year notes US2US10=TWEB steepened on Thursday to 20.7 bps from 18.2 bps late on Wednesday. The curve has steepened after five straight days of flattening.

The 30-year bond yield US30YT=TWEB was up 5.3 bps at 4.559%.