TREASURIES-US Treasury yields mixed amid Fed rate cut speculation

By Karen Brettell

NEW YORK, Feb 17 (Reuters) - U.S. Treasury yields rose from multi-month lows on Tuesday as traders evaluated likely Federal Reserve policy, with no other major catalysts to drive market direction.

Yields dipped earlier after data showed that Britain's jobless rate rose to its highest in more than a decade outside the pandemic period, while German investor morale fell unexpectedly in February. But they rose back again as traders refocused on the outlook for the U.S. economy.

Traders have increased bets that the Fed will keep rates on hold for the coming few months after data last week showed that job gains accelerated in January while inflation slowed.

Market participants also continue to expect interest rate cuts later this year, with January's jobs data showing the economy added much fewer jobs in 2025 than previously estimated.

"Overall, I think the Treasury market is taking (the mixed data) as a sign that the Fed is not in a rush to ease, but they will get to a rate cut in the middle of this year," said Will Compernolle, macro strategist at FHN Financial in Chicago.

Compernolle notes that 3% is seen as the neutral rate, and market 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 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.

Fed Governor Michael Barr said on Tuesday that another central bank interest rate cut could come somewhere well down the road amid ongoing risks to the U.S. inflation outlook.

Chicago Fed President Austan Goolsbee said that the Fed could approve "several more" interest rate cuts this year if inflation resumes a decline to the central bank's 2% target.

San Francisco Fed President Mary Daly said the central bank must dig deep on the data to assess whether artificial intelligence is boosting productivity growth and enabling faster economic growth without igniting inflation or requiring the Fed to tap the brakes with tighter policy.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, was last up 2.7 basis points at 3.437%, after earlier reaching 3.385%, the lowest since October 17.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 0.4 basis points to 4.052% and earlier reached 4.018%, the lowest since November 28.

The yield curve between two- and 10-year notes US2US10=TWEB flattened by around two and a half basis points to 61 basis points.

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

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

Iran and the United States reached an understanding on Tuesday on the main "guiding principles" in talks aimed at resolving their longstanding nuclear dispute, but that does not mean a deal is imminent, Iranian Foreign Minister Abbas Araqchi said.