TREASURIES-UK bond rally caps US yield rise fueled by strong data

(Adds details, quotes, graphic; updates market levels)

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UK bond rally influences US Treasury market

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US economic data boosts Treasury yields

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Fed rate cut expected despite strong economic indicators

By Davide Barbuscia

NEW YORK, Nov 26 (Reuters) - U.S. Treasury yields were mixed on Wednesday as stronger-than-expected economic data fueled selling, but a sharp rally in UK government bonds helped limit the downside for longer-dated U.S. debt.

Treasuries had been rallying for four consecutive days on rising expectations of an interest rate cut by the U.S. Federal Reserve in December, pushing some investors to lock in gains on Wednesday. On the other hand, the U.S. bond market mirrored the UK, where Finance Minister Rachel Reeves' budget helped ease concerns over Britain's long-term finances, pushing investors to pile into long-dated UK bonds.

"The (UK) gilt curve has strongly bull-flattened after the initial volatility following the budget announcements, and I think there's some pass-through of that bull-flattening in the UK, at least from a curve perspective, into the U.S.," said Jonathan Cohn, head of U.S. rates desk strategy at Nomura.

Global bond markets tend to move in sync due to arbitrage and hedging strategies as well as investors often responding to common economic signals. A bull flattening of the yield curve occurs when long-term interest rates fall faster than short-term rates. On the economic front, new orders for core U.S.-made capital goods jumped in September, while shipments rose strongly, reinforcing economists' expectations of faster economic growth in the third quarter, data from the Commerce Department's Census Bureau showed on Wednesday. Meanwhile, new filings for U.S. jobless claims fell last week, signaling persistently low layoffs, the Labor Department said.

Treasury yields inched higher after the data releases, which added selling pressure to a market already in consolidation mode. Yields move inversely to prices.

"You have a combination of the data ... and also you have to look at the path of yields over the course of the last two weeks, clearly testing the 4% level on the 10-year yield," said Art Hogan, chief market strategist at B. Riley Wealth.

FEDERAL RESERVE MEETING IN FOCUS

Still, Wednesday's data did not alter expectations that the Fed will cut interest rates by 25 basis points in December.

Rates futures traders were assigning an 85% probability to a December rate cut, unchanged from Tuesday, CME Group data showed.

Such expectations gained consensus over the past week as several Fed officials said they favored further easing at the central bank's upcoming rate-setting meeting.

"Almost all of the parade of Fed speakers we've heard from look at the near-term impact of core goods pricing being higher because of tariffs as something that is a one-time event, whereas they look at the weakness in the labor market as something that's an ongoing trend," Hogan said. The Fed's beige book, a snapshot of economic conditions released on Wednesday, showed little change in U.S. economic activity in recent weeks, though employment was weaker in about half of the Fed's 12 districts and consumer spending declined, likely reinforcing concerns about a softening labor market.

Benchmark 10-year yields were last at 3.999%, roughly flat on the day. On Tuesday, they dropped below 4% for the first time in nearly a month.

Two-year yields were at 3.483%, over two basis points higher than on Tuesday. Further out the curve, 30-year yields declined by over one basis point to 4.645%.

The closely watched curve comparing two- and 10-year yields flattened to 51.5 basis points from 54.3 on Tuesday.

The Treasury Department sold $44 billion in seven-year notes on Wednesday that met tepid demand.

The notes were sold with a high yield of 3.781%, which analysts said was about half a basis point above the market at the bidding deadline, in a sign investors required some premium to absorb the issuance.

(Reporting by Davide Barbuscia Editing by Rod Nickel and Will Dunham)