REFILE-TREASURIES-US yields marginally higher as investors look to key inflation data

(Corrects auction's bid-to-cover ratio in 17th paragraph to higher from lower)

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U.S. durables fall more than expected in January

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U.S. consumer confidence weakens in February

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Focus on PCE data, polls show slight uptick

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U.S. seven-year auction shows decent demand

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Fed's Bowman says Fed in no rush to cut rates

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 27 (Reuters) - U.S. Treasury yields rose moderately on Tuesday in choppy trading, as investors awaited key inflation data due out on Thursday for more clarity on when the Federal Reserve could start cutting interest rates.

U.S. yields, which move inversely to prices, earlier fell after a seven-year note auction that showed stable demand for this maturity. U.S. seven-year yields were last up 1.2 basis points (bps) at 4.342% .

Investors now look to the personal consumption expenditures price index (PCE) for January, the Fed's preferred inflation measure.

The PCE is expected to have risen 0.3% on a monthly basis in January, up slightly from the 0.2% increase seen in December, a Reuters poll showed. On a year-on-year basis, PCE is likely to have gained 2.4%, compared with a 2.6% advance the previous month.

Tuesday's mostly weaker-than-expected U.S. data weighed on yields earlier, as it supported the view that the Fed would cut rates by the summer or later in the year. The report moved the rates market a little bit, but the impact was brief.

"To the extent that inflation remains a little sticky and employment continues to hold up and support the consumer, the notion of more rate cuts is not going to happen," said Greg Faranello, head of U.S. rates strategy at AmeriVet Securities in New York.

"That what's the Fed is telling you. They're telling you that they want to be patient. They're telling you that we're not out of the woods yet with inflation," he added.

Fed Governor Michelle Bowman on Tuesday reinforced the U.S. central bank's patient stance on easing. She signaled that she is

in no rush

to cut rates, particularly given upside risks to inflation.

Data on Tuesday showed orders for long-lasting U.S. manufactured goods fell by the most in nearly four years in January, dropping by 6.1% last month, partly due to a sharp decline in bookings for commercial aircraft. Economists polled by Reuters had forecast durable goods orders tumbling 4.5%.

U.S. consumer confidence also slid in February after three straight monthly gains. The Conference Board's consumer confidence index slipped to 106.7 this month from a downwardly revised 110.9 in January. Economists polled by Reuters had forecast the index little changed at 115.0.

In afternoon trading, the benchmark U.S. 10-year yield edged up 2 bps to 4.319%. U.S. 30-year bond yields rose 2.5 bps to 4.443%.

On the shorter end of the curve, U.S. two-year yields were little changed at 4.718%.

Tuesday's durables report followed a slew of numbers this month, such as retail sales, housing starts and manufacturing production, which depicted an economy that lost traction at the beginning of the year.

The Federal funds futures market has priced in a 61% chance of a rate cut at the June policy meeting, which would be the first since the COVID-19 pandemic, according to LSEG's rate probability app. That was down from roughly a 75% probability last week. Rate futures were betting on easing in March two to three weeks ago.

Futures traders this year have factored in roughly three rate cuts or less of 25 bps each, in line with the Fed's guidance. Traders had factored in as much as five cuts a few weeks ago.

Also on Tuesday, the Treasury's seven-year note auction came in with decent numbers after weaker-than-expected sales of two-year and five-year notes on Monday. The

high yield

was at 4.327%, below the expected rate at the bid deadline, suggesting strong investor demand.

The auction's bid-to-cover ratio, another measure of demand, was 2.58, slightly higher than the 2.56 average. Indirect bids, which include foreign central banks, took down nearly 70% of supply, up from an average of 68%.

In other parts of the bond market, the U.S. yield curve steepened, or narrowed its inversion on Tuesday. The closely watched spread between 10-year and two-year yields rose to minus 40.3 bps, up from minus 44.5 bps late Monday.

This yield curve has been inverted since July 2022. An inverted yield curve typically foreshadows recession, having flagged eight of the last nine economic slowdowns.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis and Richard Chang)

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