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US TREASURY - Feb 7 (Reuters) - U.S. Treasury yields edged higher on Wednesday following strong demand for the U.S. Treasury Department's record sale of $42 billion in 10-year notes, while investors focus on any fresh clues on when the Federal Reserve is likely to begin cutting interest rates.
The 10-year notes sold at a high yield of 4.093%, almost a basis point below where they had traded before the auction. The bid-to-cover ratio was 2.56 times, the same as in January's 10-year sale. USAUCTION25
"We saw good demand from end users, or non-dealers, and we also saw good indirects, which is indicative of good overseas demand," said Vail Hartman, U.S. rates strategist at BMO Capital Markets.
The auction was the largest 10-year sale on record as the Treasury increases auction sizes to pay for a widening budget deficit.
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The Treasury said last week that it plans to continue gradually raising coupon auction sizes through April, but beyond that it does not expect further increases for at least the next several quarters, given the current projected borrowing needs.
A $54 billion sale of three-year notes saw solid demand on Tuesday. The Treasury will also sell $25 billion in 30-year bonds on Thursday.
Benchmark 10-year notes US10YT=RR gained 2 basis points on the day to 4.108%. They are holding below an 11-day high of 4.177% reached on Monday.
Two-year yields US2YT=RR rose 2 basis points to 4.425% and are down from a one-month high of 4.483% on Monday.
The inversion in the yield curve between two-year and 10-year notes US2US10=TWEB was little changed on the day at minus 32 basis points. It reached minus 42 basis points on Friday, which was the most inverted since Jan. 5.
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Treasuries have largely consolidated since a rapid two-day increase in yields on Friday and Monday on expectations that the Fed will hold rates higher for longer than previously expected.
This came as Fed Chair Jerome Powell pushed back against market pricing for a rate cut in March, and after jobs and services sector data for January came in better than economists had expected.
The next major driver for the market will be the Consumer Price Index (CPI) due next Tuesday.
Richmond Fed President Thomas Barkin said on Wednesday that there is no big rush to start cutting rates and that disinflation needs to become more broad based.
Fed Governor Adriana Kugler said she is "optimistic" on inflation but added policymakers need more assurance.
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Boston Fed President Susan Collins said that if the economy meets her expectations, the central bank will likely be able to lower rates at some point later this year.
Minneapolis Fed President Neel Kashkari said the U.S. central bank should likely reduce its policy rate two or three times this year.
Traders are pricing in a 19% chance of a March rate cut, down from 53% a week ago, and see a 68% probability of a rate cut by May, according to the CME Group's FedWatch Tool.
By Karen Brettell
(Reporting By Karen Brettell; Editing by Chizu Nomiyama and Lisa Shumaker)
