TREASURIES-US yields flat as markets await new data, budget bill outcome

By Tatiana Bautzer

NEW YORK, May 14 (Reuters) - Yields on U.S. Treasuries were flat to slightly higher on Wednesday in subdued trading, as markets awaited new economic data due on Thursday, as well as a clearer picture of future government deficits from discussions in Congress.

In late morning trading, the yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 1 basis point to 4.506%. The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 1.9 bps to 4.036%.

After a rise in yields on Monday as the U.S. and China announced a sharp reduction in tariffs for 90 days, Treasury markets are waiting for more signals from the data as to when the Federal Reserve will resume its easing policy.

"Markets are waiting for new data on Thursday regarding retail sales and the producer price index", said Tom di Galoma, managing director of rates and trading at Mischler Financial Group in Park City, Utah. He added that a speech by Fed Chair Jerome Powell expected on Thursday could be a market-mover.

Bond investors are also keen to find out the final outcome of the current budget legislation in Congress.

Republicans in the U.S. Congress advanced elements of President Donald Trump's sweeping budget package on Wednesday after a debate that lasted through the night, as a key committee voted along party lines to approve tax cuts that would add trillions of dollars to the U.S. debt.

The House of Representatives Ways and Means Committee approved the first version of the tax cut bill, but a clearer picture of the size of future budget deficits depends on discussions of spending such as potentially steep cuts to the Medicaid health program.

Investors are also looking for signs in the upcoming data releases of further inflationary pressures coming from tariffs that have already been put into effect. Relief on the trade tariffs is expected to benefit equities in the near future and pressure Treasuries, di Galoma said.

Some Treasury investors have been diversifying fixed income holdings out of the United States into Europe, with more supply coming this week from Germany and France, he added.

On Wednesday, Fed Vice Chair Philip Jefferson stressed the uncertainty surrounding the future path of inflation, including how persistent upward pressure from tariffs will be on prices. "While trade policy has received the bulk of recent attention, I remain focused on the aggregate effect from the totality of different government policy changes, including trade, immigration, regulatory, and fiscal policies", Jefferson said.

Since the U.S.-China tariff reprieve, markets have been betting that the Fed will cut interest rates twice this year, with the first one in September, according to CME's FedWatch tool.