TREASURIES-US yields pulled lower as ECB cuts rates

By Karen Brettell

NEW YORK, Jan 30 (Reuters) - U.S. Treasury yields fell on Thursday in line with falling European government bond yields as the European Central Bank cut interest rates, but recovered from lows after U.S. data pointed to a still strong economy.

The ECB cut rates by 25 basis points and kept the door open to further policy easing as concerns over economic growth supersede worries about persistent inflation.

"It seems like most of what's driving U.S. Treasury yields now is European governments,” said Tom di Galoma, head of fixed income trading at Curvature Securities. “Our rates are trying to stay in parallel with their rates.”

Yields came off their lows after U.S. data showed that the number of Americans filing applications for unemployment benefits fell more than expected last week.

A separate report also showed that U.S. economic growth slowed in the fourth quarter, but robust domestic demand will probably keep the Federal Reserve on a slow interest rate cut path this year.

On Wednesday the U.S. central bank held rates steady and Fed Chair Jerome Powell said that there would be no rush to cut rates again until inflation and jobs data made it appropriate.

The Fed is seen as likely to hold rates steady for the near-term as it gauges the impact of policies enacted by the Donald Trump administration on the U.S. economy.

“The U.S. economy is pretty healthy,” di Galoma said. Meanwhile, “the Fed is basically telling you they’re not going to do anything. They are waiting on the (Trump) administration’s proposals.”

Fed funds futures traders are pricing in the next rate cut as being most likely in June, and see two 25 basis point cuts as likely by year-end.

The next major economic release will be Friday’s PCE data for December. It is expected to show that headline prices rose 0.3% in the month while core prices rose by 0.2%, for an annual gain of 2.6% and 2.8%, respectively, according to economists polled by Reuters. USPCE=ECI, USPCEM=ECI, USPCEY=ECI, USPCE2=ECI

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, was last down 1.9 basis points on the day at 4.207%.

Benchmark 10-year yields US10YT=RR fell 4.5 basis points to 4.51% and earlier reached 4.486%, the lowest since Dec. 20.

The yield curve between two-year and 10-year yields US2US10=TWEB flattened by around 2 basis points to 30.4 basis points.