TREASURIES-US yields dip after soft data; Trump policy questions persist

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Trumps softens stance on China

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US 2/10 yield curve steepens for 3rd day

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US business activity slows in January

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US final consumer sentiment index falls

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Fed seen holding rates steady next week

(Adds new comment, U.S. data, graphics, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 24 (Reuters) - U.S. Treasury yields fell on Friday, weighed down by weaker-than-expected data on consumer sentiment and business activity in the world's largest economy, backing expectations that the Federal Reserve will cut interest rates at least once this year.

U.S. rate futures priced in about 44 basis points (bps) of rate cuts in 2025 after the economic data, up from 39 bps late Thursday, according to LSEG data. The market also factored in a 71% chance that the next rate reduction would likely take place at the Fed's June meeting.

"I am not reading too much into today's movement in Treasuries," said JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management in Chicago. "We're off the recent peaks on the long end since the CPI (consumer price index) news and this is not a big week for economic data."

A report last week showed that the growth in core CPI, excluding the volatile food and energy components, slowed in December, rising just 0.2% after a 0.3% increase in the previous month. Prior to December, the so-called core CPI had risen 0.3% for four straight months.

Investors also continued to await more definitive policies on tariffs from the new administration.

U.S. yields extended their fall after data showed U.S. business activity slowed to a ninth-month low in January amid rising price pressures, although firms reported that they boosted hiring.

S&P Global's flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, eased to 52.4 this month. That was the lowest since April and was down from 55.4 in December. A reading above 50 indicates expansion in the private sector.

In a separate report, the University of Michigan's final estimate on consumer sentiment fell to 71.1 from a previous estimate of 73.2.

In midday trading, the benchmark U.S. 10-year yield slipped 1.8 basis points to 4.617%. It was last up less than 1 bp so far this week.

The yield on the 30-year bond was down 1.9 bps at 4.849%.

On the short end of the curve, the two-year Treasury yield, which is typically tied to monetary policy, fell 2.8 bps to 4.257%.

FOCUS ON TARIFFS

Pronouncements on tariffs, meanwhile, remained a focus in the bond market because of their impact on inflation.

President Donald Trump late Thursday softened his stance on China with respect to tariffs. In an interview with Fox News, Trump said he would rather not have to use tariffs against China and that he thought he could reach a trade deal with the world's second-largest economy.

That was a massive step back from his campaign threat of imposing 60% duties on Chinese imports.

"We're going to continue to get a lot of headlines and back and forth here," Bianco said. "It's really hard to factor that in a meaningful way until we see something more concrete."

The U.S. Treasury yield curve on Friday, meanwhile, steepened, with the gap between two-year and 10-year yields hitting 38.6 bps, compared with 35.1 late Thursday.

The curve, which was last at 36 bps, has steepened for a third straight day. The overall trend in an easing cycle remained tilted toward a steeper curve, analysts said, with yields on longer-dated Treasuries higher than short-term maturities.

Fed policymakers next week are expected to keep interest rates on hold, although the bigger debate will be how the central bank confronts early statements from Trump, including demands that the Fed continue lowering borrowing costs.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski and Andrea Ricci)