TREASURIES-US yields narrowly mixed after data, ahead of Trump inauguration

Recasts, adds analyst comment, bullets, details about US data, US rate futures; updates prices

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 17 (Reuters) - U.S. Treasury yields were mixed on Friday in a choppy session, with those on the shorter end of the curve higher after yet another set of upbeat data on housing and industrial production, backing expectations that the Federal Reserve will slow the pace of rate cuts and likely ease just once this year.

Investors overall are also hesitant to make big bets ahead of the inauguration of U.S. President-elect Donald Trump on Monday, amid policy uncertainty on tariffs, tax cuts, and immigration.

The U.S. two-year yield, which tracks interest rate moves by the Fed, rose 3.2 basis points (bps) to 4.269% US2YT=RR, after earlier hitting a two-week low of 4.221%.

On the week, however, the two-year yield was down 14 bps, on track for its largest weekly fall since late November.

The benchmark 10-year yield slid 1.4 bps to 4.592% US10YT=RR, earlier falling to a two-week trough as well. It fell 18 bps this week, on pace for its worst weekly decline in seven weeks.

Data showed single-family housing starts, which account for the bulk of homebuilding, rose 3.3% to a seasonally adjusted annual rate of 1.050 million units last month. Data for November was revised higher to show homebuilding increasing to 1.016 million units from the previously reported 1.011 million units.

A separate report showed U.S. manufacturing output increased 0.6% last month after an upwardly revised 0.4% rebound in November, as production at Boeing BA.N picked up following the end of a crippling strike by factory workers at the aerospace giant. Economists polled by Reuters had forecast production rising 0.2%.

Post-data, U.S. rate futures priced in nearly 40 bps of rate cuts in 2025, from about 43 bps late Thursday, according to LSEG data. The market also factored in a 68% chance that the next rate reduction would likely take place at the Fed's June meeting.

"We think that over time rates should come down," said Bill Merz, head of capital markets research at U.S. Bank Asset Management in Minneapolis.

"We had pretty significant seasonal adjustments in the inflation data and that's one of the things that stoked concerns about what the Fed is going to do and how many they are going to cut this year."

But Merz said there are downward pressures on inflation "that should manifest in some shape or form in the coming quarters". He cited decelerating U.S. shelter inflation which represents half of the core consumer prices, as well as China exporting disinflation to the United States, which has been an ongoing trend for the last two years.

For U.S. Bank, two cuts this year, in line with the Fed's rate forecast in December, are a "reasonable expectation" based on the current data, Merz said.

The yield curve, meanwhile, bear flattened on Friday, with the spread between two- and 10-year yields last at 34 bps US2US10=TWEB, compared with 38.1 bps on Thursday.

A bear flattener, a scenario in which short-term interest rates are rising faster than those on longer-dated ones, reflects expectations the Fed could take its time cutting rates. That pushes yields on the front end higher.

(Reporting by Gertrude Chavez-Dreyfuss in New York; Editing by Nia Williams)

((gertrude.chavez@thomsonreuters.com; 646-301-4124))