TREASURIES-US Treasury yields edge up as traders anticipate Fed policy

By Karen Brettell

NEW YORK, Feb 19 (Reuters) - U.S. Treasury yields rose on Thursday but held near the lower end of their recent range as traders evaluated likely Federal Reserve policy and before the Treasury Department will sell $9 billion in 30-year inflation-linked debt.

Treasury yields have traded in an expanding range in recent weeks as traders gauge the strength of the economy and when the U.S. central bank is likely to resume interest rate cuts.

Michael Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management, noted that yields expanded the upside of the recent range on expectations that growth will be much larger than previously forecast. But yields fell again to set a lower end of the range as these expectations faded.

“The upside potential and the range of potential outcomes overall for the economy are more contained than we had thought a few weeks ago. And I think that's basically why we've seen this 4.20% resistance level become a support level, and then 4.10% gradually become a support level now,” Lorizio said.

LOWEST SINCE NOVEMBER 28

The yield on benchmark U.S. 10-year notes US10YT=RR was last up 0.7 basis points at 4.088%. It reached 4.018% on Tuesday, the lowest since November 28, after getting as high as 4.313% on January 20.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 1.2 basis points to 3.472%, from 3.46% late on Wednesday. It fell to a four-month low of 3.385% on Tuesday.

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

Minutes from the Fed’s January 27-28 meeting released on Wednesday were more hawkish than expected, with several policymakers open to rate hikes if inflation remains elevated.

“Yesterday's minutes introduced at least the potential that some of the more hawkish members of the committee wanted that to be recognized, that there's risk both ways in the near term for the path of the Fed funds rate,” said Lorizio.

Data on Thursday showed that the number of Americans filing new applications for unemployment benefits fell more than expected last week, consistent with a stabilizing labor market.

The U.S. trade deficit, meanwhile, widened sharply in December after a surge in imports.

Personal consumption expenditures data for December due on Friday is the next major economic release.

Demand for Thursday’s sale of the 30-year Treasury Inflation-Protected Securities will be watched for signs of demand for longer-dated inflation protection. A $16 billion 20-year bond sale on Wednesday drew only soft demand.