TREASURIES-US yields perk up as investors optimistic about soft landing

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U.S. two-year yields drop to two-year low overnight

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U.S. 10-year yields rise in five of last seven sessions

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U.S. 2/10 yield curve continues its steepening trend

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U.S. rate futures price in 80 bps in cuts over next two meetings

(Adds new comment, bullets, graphic, results of U.S. five-year auction, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 25 (Reuters) - U.S. Treasury yields rose across the board on Wednesday, with those on benchmark 10-year notes advancing in five of the last seven sessions, as investors continued to believe that the Federal Reserve will be able to orchestrate a soft landing for the world's largest economy in its latest rate-cutting cycle.

U.S. two-year yields, the most sensitive to the Fed's monetary policy moves, have not fallen as much as expected following the central bank's rate reduction of 50 basis points (bps) last week. Two-year yields have weakened about 5 bps in seven days since that rate cut, which is not a lot given the size of the Fed move.

U.S. two-year yields were last up 3.7 bps at 3.557% . It dropped overnight to 3.506%, the lowest since September 2022.

U.S. 10-year yields, on the other hand, last traded up 4.9 bps at 3.784%. Since the Sept. 18 rate cut, 10-year yields have risen about 3 bps.

"We're seeing yields trend broadly higher, which is a little counter-intuitive at the start of the Fed cutting cycle," said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia.

"And that's due to the fact that if the Fed is projected to move aggressively towards neutral, to get out of ... restrictive territory, then the probability of the Fed engineering a soft landing has probably moved up."

Wednesday's data showing U.S. new home sales falling in August had little impact on the Treasury market. The expectation though is that housing demand could increase going forward with the decline in mortgage rates, likely adding to the soft landing narrative. U.S. 30-year mortgage rates inched lower to 6.13% last week, the lowest in roughly two years.

Some said the recent backup in yields was long overdue.

"It was a significant move lower in yield prior to the meeting," said Joanne Bianco, investment strategist and client portfolio manager at BondBloxx. "I am not surprised that yields are back up somewhat."

BondBloxx is an issuer of fixed income exchange traded funds (ETFs) totaling $3.3 billion across 24 ETFs.

Bianco also believes in the soft-landing outlook for the U.S. economy, which she said remains in a good place. "We think it remains there. We're not anticipating a hard landing."

In other maturities, the U.S. five-year Treasury yield climbed 3.9 bps to 3.518%, in the wake of the sale of $70 billion in five-year notes. The auction saw solid demand, picking up a high yield of 3.519%, in line with market expectations at the bid deadline.

Indirect bidders, which include foreign central banks, took down 70.3% of the note, compared with an average of 68%. Dealers, on the other hand, who step in when demand is low, were awarded just 11.5%, compared with a 14.6% average.

On the long end of the curve, U.S. 30-year bond yields were up 4.8 bps to 4.138%.

The yield curve continued to steepen, with the spread between two-year and 10-year yields hitting positive 23.6 bps , the widest gap since June 2022. It was last at 22.8 bps. A steeper curve suggests that more rate cuts are underway, which is what the market has priced in anyway.

The rate futures market has factored in a 62% chance of a 50-bp easing at the November Fed meeting, with a 38% probability of a 25 bp move, according to LSEG estimates. The market has also priced in an aggressive 80 bps of cuts over the next two meetings.

"We do think that the steepening will continue, that the front end of the curve is going to continue to have a more pronounced decline than the longer end," said Truist's Hughey.

"If the Fed intended to move quicker than what was previously projected, the path for inflation to cool down could be a bit bumpier."

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Kirsten Donovan and Nick Zieminski)