NEW YORK, Feb 25 (Reuters) -

U.S. Treasury yields dropped on Tuesday, with the benchmark

10-year yield hitting its lowest in 10 weeks, as investors

sought a refuge in bonds from signs of deceleration in the U.S.

economy and persistent geopolitical uncertainty.

Yields accelerated their fall after the U.S. consumer confidence

index declined to 98.3 in February, the lowest reading since

June. Meanwhile the tech-heavy Nasdaq led Wall Street declines

on Tuesday, hitting a six-week low.

U.S. single-family house prices increased in December, another

blow to affordability alongside elevated mortgage costs, even as

the housing supply increases.

Aside from growing signs of a slowdown, investors worried

about U.S. President Donald Trump's economic policies after he

said proposed tariffs on Mexico and Canada were still set to

start next week.

"We are beginning to see some cracks in the markets

regarding the economic outlook and anxiety about some of the

conflicting policies", said Robert Tipp, head of global bonds at

PGIM Fixed Income.

The bond market as a result is betting on more rate cuts by

the Federal Reserve this year, compared to a few weeks ago. On

Tuesday, U.S. rate futures priced in 61 basis points (bps) of

easing in 2025, compared with 44 bps late on Monday, according

to LSEG calculations.

Futures also showed that markets are expecting the first

rate cut to come in June rather than July. The higher odds for a

second cut also moved to September and October.

In late morning trading, the yield on the U.S. 10-year

Treasury note was down 9.1 bps to 4.304%, after

earlier sliding to the lowest since December 12. The yield on

the 30-year bond declined 8.4 bps to 4.564%.

U.S. two-year yields dropped 7.8 bps to 4.09%, after

earlier dropping to 4.07%, the lowest since November 1.

A sharp drop in business activity reported last week may be

interpreted as an opportunity for interest rate cuts. But

investors are still far from seeing a change in longer-term

trends for the U.S. deficit and debt.

Markets are still skeptical of the real effects on the

deficit of spending cuts by Elon Musk's Department of Government

Efficiency, known as DOGE. A significant deficit reduction "will

require more legislative progress on spending cuts", Tipp said.

Substantive budget changes would require congressional approval.

Later on Tuesday, the U.S. Treasury will sell $70 billion in

five-year notes, a day after a strong two-year note auction on

Monday.