TREASURIES-US yields retreat from day's highs after weak spending data

NEW YORK, June 27 (Reuters) - U.S. Treasury yields came off session highs on Friday, but remained marginally up on the day, after data showed consumer spending declined unexpectedly in May even though inflation remained tepid, as markets started pricing in a quicker pace of Federal Reserve easing this year.

U.S. 10-year yields were last little changed at 4.257% US10YT=RR, compared with 4.269% before the data. On the front end of the curve, two-year yields were at 3.739% US2YT=RR, up 2.5 basis points, from 3.754% just before.

Friday's data showed U.S. consumer spending unexpectedly fell in May, dipping 0.1% last month after an unrevised 0.2% gain in April, as the boost from the pre-emptive buying of goods like motor vehicles ahead of tariffs eased. According to Action Economics, this is the first decline in spending since September 2021.

U.S. personal income also fell 0.4% last month.

"For the moment, there is nothing of consequence to worry about on the inflation side of this report. There is, however, an unexpected drop in consumer spending, the first since the pandemic," Carl Weinberg, chief economist at High Frequency Economics, said in emailed comments.

"That is something to think about. The Fed will make note of this report."

Following the data, traders in rate futures on Friday added to bets the Fed will lower short-term borrowing costs by 75 basis points in 2025, most likely starting in September.

Fed funds futures priced in about 65 bps of rate cuts in 2025.