TREASURIES-Yields rise in anticipation of Treasury auction

By Herbert Lash

NEW YORK, Feb 26 (Reuters) - Treasury yields edged slightly higher on Monday in anticipation of the scheduled auction of $127 billion of government coupon debt as investors demand higher yields to take on such a large supply.

Yields turned higher as the morning progressed as investors readied for the sale of $63 billion in two-year notes at 11:30 a.m. ET (1630 GMT) and $64 billion in five-year notes at 1 p.m. (1800 GMT).

The two-year Treasury yield, which typically reflects interest rate expectations, was up 3 basis points at 4.720%, close to a three-month high of 4.759% on Friday. The 10-year's yield rose 2.3 basis points to 4.283%.

"A key question is who's going to buy this debt now that you've got problems with China, you've got problems with Japan and the size of the Treasury bonds that they own?" said John Luke Tyner, portfolio manager and fixed-income analyst at Aptus Capital Advisors in Fairhope, Alabama.

The market has sharply pulled back expectations on the timing and size of Federal Reserve rate cuts this year, which also is keeping pressure on yields, which move inversely to price, to stay higher as the U.S. economy remains strong.

"The data continues to be robust, nominal GDP is over 5% pushing on 6%," Tyner said. "That's just not an environment that you're going to get aggressive rate cuts and lower bond yields."

Fed funds futures show a 54.9% chance that the Fed starts cutting rates in June, with a 35.3% probability of no cut at all, a sharp reversal from bets on Feb. 1 of a 62% chance of a cut in March, according to CME Group's FedWatch Tool.

Futures traders also are betting on about 81 basis points of cuts by December, about half the amount they anticipated at the end of last year.

Yields edged higher after data showed sales of new U.S. single-family homes rose less than expected in January, even as demand for new construction remains underpinned by a persistent shortage of previously owned homes.

New home sales increased 1.5% to a seasonally adjusted annual rate of 661,000 units last month, the Commerce Department's Census Bureau said on Monday.

The pace of sales in December was revised lower to 651,000 units from the previously reported 664,000 units. Economists polled by Reuters had forecast new home sales rising to a rate of 680,000 units.

The yield on the 30-year Treasury bond was up 1.7 basis points to 4.397%.

The difference in yields on two- and 10-year notes , seen as a recession harbinger when the curve is inverted, or the yield on shorter-duration bonds is higher than the long end, was at -43.9 basis points.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.407%.

The 10-year TIPS breakeven rate was last at 2.306%, indicating the market sees inflation averaging about 2.3% a year for the next decade. (Reporting by Herbert Lash; Editing by Andrea Ricci)