TREASURIES-U.S. 2-year, 10-year yields tumble to more than two-month low

NEW YORK, March 15 (Reuters) - Benchmark 10-year and 2-year U.S. Treasury yields on Friday fell to their lowest levels since early January, weighed down by weaker-than-expected U.S. economic data that suggested the Federal Reserve will hold interest rates steady for the rest of the year. Expectations that the Federal Reserve will strike a dovish tone at next week's policy meeting also pressured yields, analysts said. Both U.S. 10-year and 30-year yields have declined in seven of the last 10 sessions, reflecting a benign inflation outlook and slowing growth in the world's largest economy. Data showed on Friday that U.S. manufacturing output fell 0.4 percent in February, falling for a second straight month, while factory activity in New York state was weaker than expected this month with a reading of 3.7. Following the data, U.S. 3- and 5-year yields briefly inverted, which could augur ill for the economy. Some analysts though said the movements between two short-dated maturities does not really offer a clear insight on the bond market's economic outlook. "The data was broadly disappointing ... and that's why we have seen this rally continue the way it has," said Ben Jeffery, analyst at BMO Capital Markets. In late morning trading, U.S. 10-year prices rose, as yields fell to 2.581 percent from 2.63 percent late on Thursday. Ten-year yields fell to a more than two-month low of 2.580 percent. U.S. 30-year bond yields were up at 3.007 percent , from 3.046 percent on Thursday. On the short end of the curve, U.S. 2-year yields slipped to 2.433 percent, compared with Thursday's 2.461 percent , after earlier dropping to 2.430 percent, the lowest since January 4. U.S. yields did inch higher after the better-than-expected University of Michigan consumer sentiment report, which showed an index of 97.8, higher than the consensus forecast and the previous month's reading. "As the weekend approaches, people are also setting up for what might be a dovish FOMC (Federal Reserve Open Monetary Policy Committee)" meeting, BMO's Jeffery said. Analysts unanimously expect the FOMC to leave policy rates unchanged. "The more interesting development will be what the 'dot-plot' signals about their intentions for the rest of the year," said Michael Feroli, chief U.S. economist at JP Morgan in New York. Fed officials' median projection on the number of rate increases is commonly referred to as its "dot-plot." "We suspect the median dot moves down from the two hikes they signaled in December to either no hikes or one hike for this year. We see somewhat higher odds of zero than one," Feroli said.

March 15 Friday 10:47AM New York / 1447 GMT

Price Current Net Yield % Change

(bps)

Three-month bills 2.395 2.4424 -0.010 Six-month bills 2.445 2.5093 -0.013 Two-year note 100-31/256 2.4357 -0.025 Three-year note 99-248/256 2.3858 -0.032 Five-year note 99-236/256 2.3917 -0.038 Seven-year note 100-32/256 2.4802 -0.045 10-year note 100-84/256 2.5871 -0.043 30-year bond 99-184/256 3.0143 -0.032

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 12.00 1.25

spread

U.S. 3-year dollar swap 10.00 1.00

spread

U.S. 5-year dollar swap 7.00 0.75

spread

U.S. 10-year dollar swap 1.75 0.75

spread

U.S. 30-year dollar swap -22.25 0.50

spread

(Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis)