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Trumps softens stance on China

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US 2/10 yield curve steepens for 3rd day

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US business activity slows in January

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US final consumer sentiment index falls

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Fed seen holding rates steady next week

(Adds new comment, U.S. data, graphics, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 24 (Reuters) - U.S. Treasury yields fell

on Friday, weighed down by weaker-than-expected data on consumer

sentiment and business activity in the world's largest economy,

backing expectations that the Federal Reserve will cut interest

rates at least once this year.

U.S. rate futures priced in about 44 basis points (bps)

of rate cuts in 2025 after the economic data, up from 39 bps

late Thursday, according to LSEG data. The market also factored

in a 71% chance that the next rate reduction would likely take

place at the Fed's June meeting.

"I am not reading too much into today's movement in

Treasuries," said JoAnne Bianco, partner and senior investment

strategist at BondBloxx Investment Management in Chicago. "We're

off the recent peaks on the long end since the CPI (consumer

price index) news and this is not a big week for economic data."

A report last week showed that 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. Prior to December, the so-called core CPI had risen 0.3%

for four straight months.

Investors also continued to await more definitive

policies on tariffs from the new administration.

U.S. yields extended their fall after data showed U.S.

business activity slowed to a ninth-month low in January amid

rising price pressures, although firms reported that they

boosted hiring.

S&P Global's flash U.S. Composite PMI Output Index,

which tracks the manufacturing and services sectors, eased to

52.4 this month. That was the lowest since April and was down

from 55.4 in December. A reading above 50 indicates expansion in

the private sector.

In a separate report, the University of Michigan's final

estimate on consumer sentiment fell to 71.1 from a previous

estimate of 73.2.

In midday trading, the benchmark U.S. 10-year yield

slipped 1.8 basis points to 4.617%. It was last up

less than 1 bp so far this week.

The yield on the 30-year bond was down 1.9

bps at 4.849%.

On the short end of the curve, the two-year

Treasury yield, which is typically tied to monetary policy, fell

2.8 bps to 4.257%.

FOCUS ON TARIFFS

Pronouncements on tariffs, meanwhile, remained a focus

in the bond market because of their impact on inflation.

President Donald Trump late Thursday softened his stance on

China with respect to tariffs. In an interview with Fox News,

Trump said he would rather not have to use tariffs against China

and that he thought he could reach a trade deal with the world's

second-largest economy.

That was a massive step back from his campaign threat of

imposing 60% duties on Chinese imports.

"We're going to continue to get a lot of headlines and back

and forth here," Bianco said. "It's really hard to factor that

in a meaningful way until we see something more concrete."

The U.S. Treasury yield curve on Friday, meanwhile,

steepened, with the gap between two-year and 10-year yields

hitting 38.6 bps, compared with 35.1 late

Thursday.

The curve, which was last at 36 bps, has steepened for a

third straight day. The overall trend in an easing cycle

remained tilted toward a steeper curve, analysts said, with

yields on longer-dated Treasuries higher than short-term

maturities.

Fed policymakers next week are expected to keep interest

rates on hold, although the bigger debate will be how the

central bank confronts early statements from Trump, including

demands that the Fed continue lowering borrowing costs.