TREASURIES-Long-dated yields drift higher as markets eye Fed, trade talks

By Davide Barbuscia

NEW YORK, July 25 (Reuters) - Long-dated U.S. Treasury yields drifted higher on Friday in a subdued trading session, buoyed by optimism over the economic outlook as investors prepared for a data-heavy week, updates on U.S. trade talks, and a Federal Reserve policy meeting.

The U.S. central bank is expected to leave interest rates unchanged at its rate-setting meeting next week, but market expectations for two 25 basis point interest rate cuts for the rest of this year have lost some conviction in recent days, as economic data portrayed a resilient U.S. economy.

A U.S. trade deal with Japan this week and expectations of a similar agreement with the European Union have also eased market concerns ahead of President Donald Trump's August 1 tariff deadline, as the prospect of lower-than-feared import duties is largely seen as softening their economic impact.

On the U.S. economic front, the only data release on Friday was the preliminary June reading of Durable Goods Orders, which came in better than forecast, even though new orders for key U.S.-manufactured capital goods unexpectedly fell in June, the Commerce Department's Census Bureau said.

"Overall, it was a mixed release that wasn't especially encouraging for the trajectory of business spending during the second half of the year, although nothing within the data was particularly market-moving," Ian Lyngen, an analyst at BMO Capital Markets, said in a note.

With fresh catalysts in short supply, the market took its lead from Thursday's European Central Bank meeting, where policymakers kept interest rates steady and delivered a cautiously optimistic outlook on the economy, dimming hopes for further easing this year.

"The ECB was nowhere as dovish as people expected and macro data hasn’t been bad to say the least," said Slawomir Soroczynski, head of fixed income at Crown Agents Investment Management in London.

Market risk appetite has remained intact despite Tesla's disappointing financial results earlier this week, said Soroczynski. U.S. stocks opened higher on Friday following record closes for the S&P 500 and the Nasdaq.

Trump clashed with Powell during a rare presidential visit to the U.S. central bank on Thursday, but said he did not intend to fire him, as he has frequently suggested he would. On Friday, he said he got the impression that the head of the U.S. central bank might be ready to lower interest rates.

In mid-morning trade, benchmark 10-year Treasury yields US10YT=RR were at 4.417%, less than one basis point higher on the day, and 30-year yields US30YT=RR edged higher by about one basis point to 4.959%.

Two-year yields US2YT=RR, which more closely reflect expectations on monetary policy, were a touch lower at 3.917%.

Bond investors will get an update next week from the Treasury Department on its quarterly issuance plans. Analysts expect no changes to the size of long-dated debt at the July 30 refunding announcement, with the Treasury relying more heavily on Treasury bills to fund government budget deficits.

On deck next week, in addition to the Fed's meeting, there will also be second-quarter gross domestic product data and July Non-Farm Payrolls.