TREASURIES-US yields rise on last day of 2024, more volatility seen next year

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US 10-year yield posts best yearly gain in two years

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US two-year yields hit two-week low

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US two/10-year yield curve reaches steepest since June 2022

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US home prices rise in October

(Recasts, updates prices, adds graphic)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 31 (Reuters) -

U.S. Treasury yields turned higher on Tuesday in thin trade, reversing a downward trend for most of the session, with little conviction in either direction on the last day of the year, as investors awaited changes under the incoming Trump administration.

U.S. yields fall when Treasury prices rise. The bond market is closed on Wednesday for New Year's Day.

Prior to the latest downturn in prices, market participants had been buying Treasuries after a meaningful sell-off this month that pushed the benchmark 10-year yield to a roughly six-month high a few days ago.

In afternoon trading, the 10-year yield rose 3.4 basis points (bps) to 4.579%. For the year, the yield has advanced more than 60 bps, its best yearly gain in two years. It hit 4.7390% in late April, the highest level in 2024.

For December, the peak was 4.641%, hit on Dec. 26, a more than six-month high, as the market priced in more inflation pressures in 2025 under Republican President-elect Donald Trump, with tariffs and tax cuts.

As the end of the year approached, investors looked to how bonds will trade in 2025 with a new Republican government and an expected increase in the fiscal deficit, which would entail more Treasury debt issuance.

Torsten Slok, chief economist and partner at Apollo Global Management in New York, wrote in his daily blog on Tuesday that the term premium, or the expected excess return that investors earn by holding longer-dated U.S. Treasuries versus rolling over T-bills, has increased 75 bps over the past three months.

"In other words, 10-year rates have increased an additional 75 bps more than what can be justified by changing Fed expectations, which is likely a reflection of emerging fears in markets about U.S. fiscal sustainability," Slok said.

"Combined with the significant decline in the Fed's reverse repo facility (RRP) usage and the dramatic increase in T-bill issuance in 2024, which needs to be rolled over into longer duration, the risks are rising that rates markets will be more volatile in 2025."

Reverse repos are conducted by the New York Fed's Open Market Trading Desk and are a key tool to manage short-term rates. In a reverse repo, market participants lend cash to the Fed, usually overnight, at an interest rate of 4.25%, in exchange for Treasuries or other government securities, with a promise to buy them back.

On the shorter end of the curve, the two-year yield, which is more sensitive to the policy rates outlook, was flat at 4.252%. It hit a roughly two-week low earlier in the session of 4.217%.

The two-year yield started 2024 at 4.328% and was ending the year so far at 4.254%, or a decline of about 7 bps. The decline was not surprising given that the Fed launched its easing cycle in September.

Treasury yields trimmed losses after data showed that the U.S. Federal Housing Finance Agency home price index rose 0.4% to 432.3 in October after surging 0.7% to 430.6 in September. It was the fifth straight monthly gain after a flat reading in May, with no decline in the index since August 2022, according to Action Economics.

In other parts of the Treasuries market, the U.S. yield curve steepened with the spread between two- and 10-year yields hitting 34.3 bps, which is the steepest since May 2022. It was last at 32.9 bps, compared with 28.7 bps late on Monday.

The curve typically steepens in an easing cycle as the rise at the short end is restrained as it would typically reflect interest rate cuts.

In the rate futures market, traders on Tuesday have priced in an 89% chance of a pause in rate cuts in January. U.S. rate futures have priced in just 47 bps of rate easing in 2025, or about two 25-bp cuts, LSEG calculations showed.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Hugh Lawson and Leslie Adler)