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Republicans advance some parts of Trump package

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Fed's Jefferson says tariffs will lift inflation

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US fed funds futures price in two cuts this year

By Tatiana Bautzer

NEW YORK, May 14 (Reuters) - Yields on U.S. Treasuries

were flat to slightly higher on Wednesday in subdued trading, as

markets awaited new economic data due on Thursday, as well as a

clearer picture of future government deficits from discussions

in Congress.

In late morning trading, the yield on the benchmark U.S.

10-year Treasury note rose 1 basis point to

4.506%. The two-year U.S. Treasury yield, which

typically moves in step with interest rate expectations, rose

1.9 bps to 4.036%.

After a rise in yields on Monday as the U.S. and China

announced a sharp reduction in tariffs for 90 days, Treasury

markets are waiting for more signals from the data as to when

the Federal Reserve will resume its easing policy.

"Markets are waiting for new data on Thursday regarding

retail sales and the producer price index", said Tom di Galoma,

managing director of rates and trading at Mischler Financial

Group in Park City, Utah. He added that a speech by Fed Chair

Jerome Powell expected on Thursday could be a market-mover.

Bond investors are also keen to find out the final outcome

of the current budget legislation in Congress.

Republicans in the U.S. Congress advanced elements of

President Donald Trump's sweeping budget package on Wednesday

after a debate that lasted through the night, as a key committee

voted along party lines to approve tax cuts that would add

trillions of dollars to the U.S. debt.

The House of Representatives Ways and Means Committee

approved the first version of the tax cut bill, but a clearer

picture of the size of future budget deficits depends on

discussions of spending such as potentially steep cuts to the

Medicaid health program.

Investors are also looking for signs in the upcoming data

releases of further inflationary pressures coming from tariffs

that have already been put into effect. Relief on the trade

tariffs is expected to benefit equities in the near future and

pressure Treasuries, di Galoma said.

Some Treasury investors have been diversifying fixed income

holdings out of the United States into Europe, with more supply

coming this week from Germany and France, he added.

On Wednesday, Fed Vice Chair Philip Jefferson stressed the

uncertainty surrounding the future path of inflation, including

how persistent upward pressure from tariffs will be on prices.

"While trade policy has received the bulk of recent attention, I

remain focused on the aggregate effect from the totality of

different government policy changes, including trade,

immigration, regulatory, and fiscal policies", Jefferson said.

Since the U.S.-China tariff reprieve, markets have been

betting that the Fed will cut interest rates twice this year,

with the first one in September, according to CME's FedWatch

tool.