TREASURIES-US yields drift lower after poor 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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US two-year note auction results were better than expected

(Adds new comment, byline, NEW YORK and WASHINGTON datelines, results of US two-year note auction)

By Gertrude Chavez-Dreyfuss and Douglas Gillison

NEW YORK/WASHINGTON, March 25 (Reuters) - U.S. Treasury yields slipped on Tuesday, pressured by weak consumer confidence data and as a still uncertain economic outlook overshadowed initial optimism about President Donald Trump's potential flexibility on a fresh round of tariffs set to be imposed next week.

The benchmark 10-year Treasury yield fell to session lows after the release of Conference Board data showing that the consumer confidence index fell to a four-year low of 92.9, with households reporting the greatest pessimism in 12 years.

The yield was last down 2.7 basis points (bps) at 4.304% , after earlier hitting a one-month high of 4.369%.

"Consumers are still pessimistic about their income prospects, they're still worried about tariffs," said Vinny Bleau, director of fixed-income capital markets at Raymond James in Memphis. "The narrative seems to be shifting more toward the fact that tariffs are going to impact growth more than inflation."

Investors on Monday sold Treasuries and equities rose after Trump said that import duties due April 2 would be less harsh than markets previously feared, with a "lot of countries" getting a break.

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."

Federal Reserve Governor Adriana Kugler on Tuesday also alluded to challenges to the economic outlook. In prepared remarks, Kugler said she saw slowing progress in reducing inflation toward the central bank's 2% target as recent upticks in goods prices were "unhelpful."

Also on Tuesday, the U.S. Treasury sold $69 billion in two-year notes, with generally solid results. It was the first of a series of auctions this week totaling $183 billion.

Tuesday's note was priced at a rate of

3.984%

, lower than the expected yield at the bid deadline, suggesting that the auction was well-subscribed. Investors did not a demand a higher rate to purchase the two-year note.

The bid-to-cover ratio, another gauge of demand, was 2.66, higher than the six-auction average of 2.64. Indirect bidders, meanwhile, which include foreign central banks, were awarded 75.8% of the total auction, higher than the 71.7% average for the last six auctions.

Following the auction, U.S. two-year yields slid 3.9 bps to 3.998%, extending their fall.

Investors will also be focused this week on a batch of economic indicators, with Friday's personal consumption expenditures price index, the Fed's preferred inflation indicator, as the main event. The consensus forecast sees the index holding steady, but well above the Fed's 2% target.

Congress is considering extending 2017's sweeping tax cuts even as 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 afternoon trade, U.S. 30-year yields inched lower to 4.649%, down about 1 bp.

The moves still broadened the gap between the yields of two- and 10-year Treasury notes, seen as an indicator of economic expectations, to 30.1 bps, up from 29.6 bps late Monday.

(Reporting by Gertrude Chavez-Dreyfuss in New York and Douglas Gillison in Washington; Editing by Nick Zieminski and Leslie Adler)