TREASURIES-US yields edge higher after upbeat data, ahead of Trump inauguration

Adds comment, graphic; updates prices

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 17 (Reuters) - U.S. Treasury yields drifted higher on Friday in a choppy session, 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 bond market is closed on Monday for the Martin Luther King Jr. Day holiday.

The U.S. two-year yield, which tracks interest rate moves by the Fed, rose 3.4 basis points (bps) to 4.272% US2YT=RR, after earlier hitting a two-week low of 4.221%.

On the week, however, the two-year yield was down 12.4 bps, its largest weekly fall since late November.

The benchmark 10-year yield was up 0.1 bp at 4.613% US10YT=RR, earlier falling to a two-week trough as well. It slid 16.1 bps this week, its worst weekly decline in seven weeks.

"A lot of that selloff was really just a recalibration of the last couple of days. The CPI (consumer price index) was an emphatic change to the narrative that inflation was this hopeless cause," said Will Compernolle, macro strategist at FHN Financial in New York.

The growth in core CPI, excluding the volatile food and energy components, slowed in December, rising just 0.2% after a 0.3% increase in the previous month, data showed on Wednesday. The so-called core CPI had risen 0.3% for four straight months.

"Today's increase in yields is not all that notable. People are just waiting to see all the executive action next week," Compernolle said.

Friday's 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 an increase 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%.

The manufacturing data also lifted Treasury yields.

After the release of the data, U.S. rate futures priced in 39 bps of rate cuts in 2025, from about 43 bps late Thursday, according to LSEG data. The market also factored in a 66% 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 consumer prices, as well as China exporting disinflation to the United States, which has been an ongoing trend for the last two years.

U.S. Bank Asset Management expects the Fed to cut interest rates twice in 2024, which matches the Fed's own forecast from December, Merz said.

On Friday, the U.S. Treasury yield curve experienced what traders call a "bear flattening," where short-term interest rates rose more quickly than long-term rates. The gap between 2-year and 10-year Treasury yields narrowed to 33.5 bps US2US10=TWEB, down from 38.1 bps on Thursday.

The pattern reflects expectations the Fed could take its time cutting rates because of strong economic data, pushing shorter-term yields higher.

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

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