NEW YORK, Feb 20 (Reuters) - U.S. Treasury yields fell on Tuesday in a holiday-shortened week as investors consolidated positions following last week's gains on the long end of the curve in the wake of stronger-than-expected inflation data.
The decline in UK and Canadian yields also weighed on their U.S. counterpart, analysts said, on a day when scant economic data was released in the United States. Investors are looking to Wednesday's minutes of the January Federal Open Market Committee meeting for more clues on the U.S. interest rate outlook.
UK two-year and 10-year gilt yields fell after Bank of England Governor Andrew Bailey said on Tuesday he was comfortable with investors betting on interest rate cuts this year.
Canadian yields also weakened after Canada's annual inflation rate slowed significantly more than expected to 2.9% in January and core price measures also eased, data showed on Tuesday, bringing forward bets for an early interest rate cut.
Moves in those markets had a spillover effect on Treasuries, analysts said.
"We also have the FOMC minutes on Wednesday. So nobody is going to move a great deal. We don't have Treasury auctions either and we don't have a lot of news to move yields here," said Stan Shipley, managing director of fixed income strategy at Evercore ISI.
"It's not so much about the 10-year but the two- to three-year since we have pulled out a lot of the cuts already. And that's where there is more interest."
In late morning trade, the benchmark U.S. 10-year yield fell 4.5 basis points (bps) to 4.249%.
On the shorter end of the curve, U.S. two-year yields dropped 7.8 bps to 4.578%.
The U.S. rate futures market has priced in an 80% chance of a rate cut at the Fed's March policy meeting, which would be the first rate cut since the COVID-19 pandemic, according to LSEG's rate probability app. Two weeks ago, rate futures were betting on easing in March.
For 2024, futures traders are pricing in at least three rate cuts of 25 bps each, taking down the fed funds rate to 4.3% by the end of the year. Two weeks ago, traders factored in at least five cuts.
The three rate declines were in line with the Fed's interest rate forecast, as outlined in its so-called dot plot.
The U.S. yield curve, meanwhile, steepened on Tuesday, with the closely-watched spread between 10-year and two-year U.S. Treasury yields at minus 32.8 bps, up from minus 36.7 bps late on Friday.
A typical predictor of recessions, the U.S. yield curve has been inverted since July 2022.
Some analysts attributed part of the steepness of the curve to the Conference Board's Leading Economic Index released on Tuesday. A steeper curve suggests that rates have peaked and the next move by the Fed would be a cut.
The index, meant to be a gauge of future economic activity, fell 0.4% in January to 102.7, the lowest level since April 2020 when the U.S. was in a brief recession after the onset of the pandemic and related shutdowns.
That said, the Conference Board pointed out that the leading index "does not signal recession ahead." (Reporting by Gertrude Chavez-Dreyfuss in New York Editing by Matthew Lewis)
