TREASURIES-US yields advance as Trump policies gain momentum with Red sweep

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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

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Republicans win majority of US House seats

(Recasts; adds new comment, bullets, byline, NEW YORK dateline; updates prices)

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 seats in a government sweep, Reuters reported on Monday, citing Decision Desk HQ projections.

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 Tuesday's election.

The two-year Treasury yield, which is sensitive to expectations for U.S. interest rates, rose to 4.34%, its highest since July 31 and was last up 7.3 basis points (bps) at 4.328%.

The bond market was closed on Monday for Veterans Day.

"In the middle of the curve, there has been a repricing - although low conviction - toward a higher terminal rate," said Will Compernolle, macro strategist at FHN Financial in New York. "The market is expecting that some of Trump's new policies will not allow the Fed to cut as much as they would like.

Some 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%.

At midday, the U.S. five-year yield was up 9.9 bps at 4.292%.

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 85% chance of a 25 bp rate cut at next month's policy meeting, and a 15% probability that the Fed will pause easing.

For 2025, rate futures have implied just 47 bps in reductions, compared with about 67 bps a few weeks ago.

In other maturities, the benchmark U.S. 10-year yield rose 9.8 bps to 4.406%.

U.S. 30-year yields advanced 7.2 bps to 4.549% .

The yield curve steepened on Tuesday, with the gap between two-year and 10-year yields at 7.3 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 short-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 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 U.S. inflation will average roughly that percentage over the next five years. (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Stefano Rebaudo in Milan; Editing by Amanda Cooper and Richard Chang)