(Adds new analyst comment, graphic, updates prices)

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US two-year yields hit highest since late July

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US fed fund futures price in fewer Fed cuts in 2025

By Gertrude Chavez-Dreyfuss

NEW YORK, Nov 12 (Reuters) - U.S. Treasury yields rose

on Tuesday as bond investors jumped back into the market after a

long weekend, and resumed pricing in President-elect Donald

Trump's policies of lower taxes and trade tariffs that are

viewed as inflationary.

That could mean a slower pace of easing interest rates by

the Federal Reserve.

Trump's policies are expected to be implemented largely

unimpeded with Republicans winning a majority of U.S. House of

Representatives seats, Reuters reported on Monday, citing

Decision Desk HQ projections. In addition to Trump winning the

presidency, Republicans had already secured a U.S. Senate

majority of at least 52-46, Edison Research projected, and DDHQ

predicted they would hold at least 218 seats in the House of

Representatives, with eight races yet to be called in the Nov. 5

election.

The two-year Treasury yield, which is sensitive

to expectations for U.S. interest rates, rose to 4.367%, its

highest since July 31. It was last up 8.8 basis points (bps) at

4.342%, the largest one-day rise since early October.

The bond market was closed on Monday for Veterans Day.

"People are still concerned about the inflation outlook

under a tariff and an anti-immigration regime. Certainly, we're

going to be focused on CPI (consumer prices index) tomorrow

(Wednesday), which of course will not be affected by tariffs

yet," said Thierry Albert Wizman, global rates and FX strategist

at Macquarie in New York. "But if people see that CPI is higher

than expected tomorrow, compounding that with the prospect of

tariffs under a Trump administration, and I could see why the

bond market has been nervous."

Headline U.S. CPI is seen at 0.2% for October, unchanged

from the month before. But year-on-year CPI is expected to be

2.6%, compared with 2.4%, according to a Reuters poll.

In afternoon trading, the U.S. five-year yield was up 11.1

bps at 4.308%, the biggest daily increase in roughly

six weeks.

Analysts expect the Trump administration to increase

government borrowings due to higher fiscal deficits, lower taxes

and higher tariffs.

U.S. rate markets have already pared back expectations on

the magnitude of the Fed's rate cuts. Federal funds futures,

which measure the cost of unsecured overnight loans between

banks, have priced in an 81% chance of a 25 bp rate cut at next

month's policy meeting, and a 19% probability that the Fed will

pause easing, according to LSEG calculations.

For 2025, futures have implied just 45 bps in rate

reductions, compared with about 67 bps a few weeks ago.

"The market is expecting that some of Trump's new policies

will not allow the Fed to cut as much as they would like," said

Will Compernolle, macro strategist at FHN Financial in New York.

Many bond investors have increased their neutral or terminal

rate, at which monetary policy is considered neither restrictive

or accommodative, to 3.5%-3.75% from 3%-3.25%.

In other maturities, the benchmark U.S. 10-year yield

surged 12.9 bps to 4.437%.

U.S. 30-year yields advanced 10.3 bps to 4.581%.

The yield curve steepened on Tuesday, with the gap between

two-year and 10-year yields at 9.1 bps. The gap

narrowed as much as 1.9 bps earlier in the session, the lowest

in a month. It was at 19.5 bps on Nov. 6, a day after the

election.

A steeper curve reflects bullish bets on shorter-dated

Treasuries and a bearish view on longer-dated exposure, pushing

yields on longer-dated Treasuries higher than those on

short-term maturities.

This means investors are expecting the Fed to keep on

cutting interest rates, curbing the short end of the curve. At

the same time, they are selling the back end, reflecting

expectations that inflation will accelerate, driven by those

rate cuts or factors such as Trump's policies to lower taxes and

raise tariffs.

The U.S. breakeven inflation rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) has risen 55

bps since Sept. 10, when it was a four-year low. The rate was

last up at 2.435%, suggesting that U.S. inflation will average

roughly that percentage over the next five years.