TREASURIES-US yields rise on potential US-China deal, data availability question

By Tatiana Bautzer and Gertrude Chavez-Dreyfuss

NEW YORK, Oct 27 (Reuters) - U.S. Treasury yields were modestly higher on Monday as hopes of a trade deal between the United States and China boosted risk appetite even as investors worried that lack of economic data may complicate decisions on interest rate cuts in December.

In afternoon trading, the yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was little changed at 3.997%, paring earlier increases in the session.

The risk-on sell-off in Treasuries pushed yields higher due to the China-U.S. deal, said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"The sell-off, however, is being unwound a little bit, but that's still the primary reason for the direction of yields."

Yields may have risen more in the morning due to two large auctions, one selling $69 billion in 2-year notes and another $70 billion in 5-year notes.

Ahead of a bond and note auction, investors tend to sell Treasuries to lift the yield before buying them back at a lower price, a practice called concession. Barnes said this had contributed to higher yields on Monday as well.

The U.S. two-year note auction, meanwhile, showed mixed results, pricing slightly below the market's rate forecast at the bid deadline and suggesting investors demanded a small premium.

However, direct bidders, who submit bids for their own investment accounts directly to the U.S. Treasury, accepted 34.8% of the two-year supply, the highest since October 2012 and the second best on record, according to analysts.

The five-year note auction had better results, priced at 3.625% below the six-auction average of 3.894%. The bid to cover ratio, a measure of demand, was 2.38, higher than the 2.36 average.

After the auction, U.S. two-year US2YT=TWEB U.S. Treasury yields, which typically moves in step with interest rate expectations, were up 1.9 basis points (bps) at to 3.503%.

Analysts still widely expect a 25-bp rate cut at Wednesday's Federal Open Market Committee meeting, said Tom di Galoma, managing director at Mischler Financial.

Future markets estimated on Monday the odds of 25 basis-point rate cut this week at 98%, CME's FedWatch tool showed.

The September CPI on Friday showed that pressures from import tariffs on prices are weaker than expected and reinforced the consensus, BMO analysts led by Ian Lyngen said in a note.

The interest rate trajectory through December, however, looks less certain. "We'll probably see a lack of U.S. macroeconomic data and that is worrying investors", said Mischler's di Galoma.

Even if the government reopens in November, the effect on data availability could extend well into 2026, analysts said.

In this context, U.S. consumer confidence data due to be released on Tuesday by the Conference board will be watched more closely than usual, according to BMO.

A closely-watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, flattened to 48.7 bps from 51.5% late on Friday. That was the narrowest spread since September.