TREASURIES-US yields fall on soft housing data, weak consumer sentiment

By Tatiana Bautzer

NEW YORK, May 16 (Reuters) - Yields on U.S. Treasuries fell on Friday after data showed weaker housing starts than expected, as tariffs and high mortgage rates cooled activity in construction, and following deterioration in consumer sentiment this month.

The benchmark 10-year yield US10YT=RR was down 2.2 basis points (bps) in late morning trading, at 4.433%. Yields on 10-year treasuries went through a roller coaster this week, with sharp rises on Monday and drops since Wednesday.

On the week, the yield rose 5.5 bps, on track for its largest weekly gain since April 7.

The two-year U.S. Treasury yield US2YT=RR, which typically moves in step with interest rate expectations, was little changed on the day at 3.970%. Yields have risen 9.1 bps so far this week, the biggest weekly rise since April 7 as well.

Data showed U.S. single-family housing starts fell 2.1% on a seasonally adjusted basis in April as tariffs on imported materials and high mortgage rates remained obstacles for the housing market. The report helped push yields lower.

"The housing inventory seems to be increasing, so that may also be helping the market softness," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

The University of Michigan's consumer sentiment index, meanwhile, showed worsening sentiment in May, dropping to 50.8. The survey also highlighted consumer worries about higher inflation a year from now.

Consumers' 12-month inflation expectations jumped to 7.3% from 6.5% in April.

The inflation component of the report reduced the fall in yields, with both the 10-year and two-year yields coming off their lows.

James Knightley, chief international economist at ING, wrote in emailed comments that most of the interviews for the Michigan report were conducted before the China-U.S. trade truce was announced early on Monday morning .

"That likely explains why the 1-year ahead inflation expectations jumped to 7.3% from 6.5% and the 5-10 year expectations hit 4.6%, both well above the readings seen when we actually had soaring inflation in the post-pandemic period."

He added the subsequent China trade deal and rallying stock markets "should mean the final May print is firmer."

Futures markets are betting on two rate cuts this year, with a 72% probability of the first happening at the September Fed meeting, according to CME's FedWatch tool, amid rising inflation pressures.

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, was at 46.1 bps, little changed from Thursday's level.

Investors overall gave more importance to the deceleration of the housing market than to the unexpected rise in import prices last month, which may have been influenced by currency fluctuations.

The Treasury is expected to auction $16 billion of 20-year bonds on Wednesday, as well as $18 billion in 10-year Treasury Inflation Protected Securities on Thursday.