TREASURIES-US Treasury yields mixed, following earlier drop on weak UK data

By Karen Brettell

NEW YORK, Feb 17 (Reuters) - U.S. Treasury yields were mixed on Tuesday, after two-year yields earlier reached a four-month low on weaker British economic data, as traders continued to evaluate the likely path of Federal Reserve policy.

Benchmark 10-year yields reached their lowest since November 28 and two-year yields the lowest since October 17 after data showed that Britain's jobless rate rose to its highest in over a decade outside the pandemic period, while German investor morale fell unexpectedly in February.

The yields came off their lows as trading shifted to New York and after they approached levels that are likely to provide technical resistance against further declines. This includes the key 4% level on 10-year yields.

“Even if it goes below 4%, I think it's tough to stay there without a change in the fundamentals,” said Will Compernolle, macro strategist at FHN Financial in Chicago.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, was last up 2 basis points at 3.43%, after earlier reaching 3.385%.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 0.2 basis points to 4.054% after earlier dropping to 4.018%.

The yield curve between two- and 10-year notes US2US10=TWEB flattened by around two basis points to 62 basis points.

Yields fell after data on Friday showed that U.S. consumer prices increased less than expected in January.

That came after a brief spike in yields as Wednesday’s jobs report for January showed U.S. job growth unexpectedly accelerated during the month and the unemployment rate fell to 4.3%.

Traders have ramped up bets that the Fed may cut rates three times this year as inflation data improves, and on concerns about a softening labor market.

Compernolle notes that the 3% level is seen as the neutral rate, and that positioning is mostly about how soon the U.S. central bank is likely to reach that level.

“The pace to get there is maybe changing with the data, but that destination isn't changing much,” Compernolle said.

Fed funds futures traders are now pricing in around 60 basis points of cuts by year end, with the benchmark interest rate expected to approach 3% by then and remain in that area through at least June 2027.

Geopolitical risks are also in focus as the United States and Iran undergo nuclear talks.

Iran and the United States reached an understanding on the main "guiding principles" in a second round of nuclear talks in Geneva on Tuesday but work still needs to be done, Iranian Foreign Minister Abbas Araqchi said.