TREASURIES-US yields dip after weak consumer confidence data

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US consumer confidence reading falls in March

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Fed's Kugler sees slow progress on US inflation

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Focus on US two-year note auction

By Douglas Gillison and Davide Barbuscia

March 25 (Reuters) - U.S. Treasury yields were mostly lower on Tuesday, pressured by weak consumer confidence data and a still uncertain economic outlook, threatening the possibility of a third straight day of gains based on President Donald Trump's signals about potential flexibility on a fresh round of tariffs next week.

The Conference Board reported that its consumer confidence index had fallen to an unexpectedly low 92.9, with households reporting

the greatest pessimism

in 12 years.

The benchmark 10-year Treasury yield fell to session lows following the data after earlier hitting one-month peaks.

Investors on Monday had sold Treasuries while equities rose as Trump said import duties due April 2 would be less harsh than markets previously feared, with a "lot of countries" getting a break. The comments had sent stocks sharply higher and flushed investors from safer bonds. If implemented fully, the new tariffs are mostly expected to drive inflation higher and hurt economic growth, so the prospect of more targeted import duties offered some relief.

However, investors are still contending with fiscal, policy and labor market uncertainty that has kept trading range-bound in recent weeks.

Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York, said rates were unlikely to break out of the recent trend until the outlook shifts meaningfully.

"It's still very tenuous. I think conviction levels are extremely low but there's been a little positive sentiment going through markets," said Goldberg. "I think it'll probably take economic data or tariffs to really break us out of the range."

Fed Governor Adriana Kugler on Tuesday also alluded to challenges to the economic outlook. In prepared remarks, the Fed official said

she saw slowing progress toward reducing inflation toward the central bank's 2% target as recent upticks in goods prices were "unhelpful."

Later on Tuesday, the Treasury will sell $69 billion in two-year notes, the first of a series of auctions this week totaling $183 billion. This could offer clues as to investor appetite for safe-haven Treasuries ahead of the April 2 tariffs, which remain the main risk event for markets in the coming days.

Amid a batch of economic indicators due later this week, the most important is Friday's personal consumption expenditures price index, the Fed's preferred inflation indicator. The consensus forecast sees the index holding steady, but well above the Fed's 2% target.

Congress, meanwhile, is considering extending 2017's sweeping tax cuts and the full effect of deep cuts to the federal workforce from Elon Musk's Department of Government Efficiency may have yet to show up in the jobs data.

In late morning trade, the 10-year was marginally lower at 4.327, while the two-year slipped 1.5 basis points (bps) to 4.022%.

The moves still broadened the gap between the two- and 10-year Treasury notes, seen as an indicator of economic expectations over Monday's close, to 30.3 basis points, up from 29.6 bps late Monday. (Reporting by Douglas Gillison and Davide Barbuscia; Editing by Andrea Ricci and Deepa Babington)