TREASURIES-US yields drop in flows-driven market

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US 10-year, 2-year yields post biggest daily decline in 5 weeks

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Chicago PMI falls in December

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US 2/10 yield curve flattens

(Recasts, adds new comment, byline, bullets, pending home sales data, details of Chicago PM data, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 30 (Reuters) - U.S. Treasury yields fell on Monday, with that of the benchmark 10-year note on track for its biggest daily decline in about five weeks, as investors continued to pour cash into the bond market amid a retreat on Wall Street.

In midmorning trading, the U.S. 10-year yield dropped 6.6 basis points (bps) to 4.553%, potentially its biggest one-day slide since Nov. 25. On the short end of the curve, the two-year yield eased 6.4 bps to 4.262%, also on pace for its largest daily retreat in five week.

"The bond market has somewhat taken its cue from what's happening in the equities market," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"Investors did some profit taking in equities and maybe re-deployed to fixed income. At this point, the bond market is compelling given the recent rise in bond yields over the past weeks."

Since hitting a roughly five-week low on Dec. 6, the 10-year yield has gained nearly 40 bps. Wall Street shares, on the other hand, hit their lowest in more than a week on Monday amid thin volume.

Treasury yields also extended their fall after data showed business activity in the U.S. Midwest fell this month.

The December reading of the Chicago Purchasing Managers Index was 36.9, down from 40.2 the month before. The consensus forecast was for an increase to 42.8, according to a Reuters poll.

"Since the end of the Great Recession in 2009, there have only been seven prints with a thirty handle for the Chicago PMI, three of those were during the depths of the pandemic period," wrote Lou Brien, market strategist, at DRW trading in Chicago, in emailed comments.

New Orders fell 13.5 points to the second lowest since May 2020, according to the Chicago PMI release, as more than half of respondents reported fewer new orders for the first time since June 2020.

U.S. yields didn't really budge even after data showed contracts to buy previously-owned homes in the United States rose more than expected in November, notching a fourth straight month of gains.

The National Association of Realtors (NAR) said on Monday its Pending Home Sales Index, based on signed contracts, rose 2.2% last month to 79.0 - the highest since February 2023 - from 77.3 in October.

Economists polled by Reuters had forecast contracts, which become sales after a month or two, would rise 0.9% after increasing 1.8% in October.

In other maturities, U.S. 30-year yields slipped 4.9 bps to 4.761%.

The U.S. yield curve flattened, with the spread between two- and 10-year yields at 28.3 bps, compared with 29.5 bps late on Friday. The curve had steepened to 30.3 bps on Friday, posting its widest gap since June 2022.

Monday's flattening was viewed as a minor correction from the steepening trend seen in the last few weeks. Yield curves tend to be steeper in an easing cycle, with the short end's rise under control. (Reporting by Gertrude Chavez-Dreyfuss)