*

Retail sales improve in February, NY factory activity

plummets

*

Stock market rally reduces demand for safe haven US debt

*

Fed's Powell expected to remain cautious on rate cuts this

week

(Updates to New York afternoon)

By Karen Brettell

March 17 (Reuters) -

Shorter-dated U.S. Treasury yields rose on Monday as a

closely watched segment of February's retail sales report beat

economists' expectations, before the Federal Reserve this week

is expected to keep interest rates on hold.

A stock market rally also reduced safe haven demand for U.S.

government debt.

Yields hit a session high after the Control Group in

February's retail sales data rose 1% during the month. Trading

was choppy, however, as headline retail sales posted only a 0.2%

gain, below economists' estimates.

"You can make either positive or negative trends out of it.

Much of the swings were in non-store retailers. They were

unusually weak last month. They were unusually strong this

month. It probably just evens out," said Guy LeBas, chief fixed

income strategist at Janney Montgomery Scott.

Other data showed that factory activity in New York State

plummeted this month by the most in nearly two years.

The yield on benchmark U.S. 10-year notes was

last up 0.2 basis points on the day at 4.31%.

The 2-year note yield, which is highly sensitive

to interest rates, rose 4 basis points to 4.055% and reached

4.065%, the highest since February 28.

The yield curve between two-year and 10-year notes

flattened by around four basis points to 25 basis

points. This flattening is reflecting some concerns that the Fed

may be too slow to cut rates as the economy slows.

Investors remain nervous that new trade tariffs will dent

the economy while also pushing up prices.

U.S. President Donald Trump said he has no intention of

creating exemptions on steel and aluminum tariffs and said

reciprocal and sectoral tariffs will be imposed on April 2.

U.S. Treasury Secretary Scott Bessent played down recent

stock market weakness in an interview on Sunday, saying

corrections were healthy and that markets "will do great" if the

administration puts into place good tax policy, deregulation and

energy security.

That dashed some hopes that the government will change

policies as a result of market moves.

The Fed is expected to hold interest rates steady when it

concludes its two-day meeting next Wednesday, and Chair Jerome

Powell is likely to repeat recent comments that the U.S. central

bank is in no rush to resume rate cuts.

"Powell kind of sealed the deal with his Friday speech

before the blackout period, and the message there was - hey,

it's too soon to really think about protecting the economy with

rate cuts," Le Bas said. "There's no reason for that to shift in

such a short period of time."

Fed funds futures traders see the U.S. central bank as most

likely to resume rate cuts in June. Fed policymakers will update

their interest rate and economic projections this week.

Traders are also watching discussions over a possible

Russia-Ukraine peace deal.

Trump said he plans to speak to Russian President Vladimir

Putin on Tuesday and discuss ending the war in Ukraine, after

positive talks between U.S. and Russian officials in Moscow.

The Treasury will sell $13 billion in 20-year bonds on

Tuesday, and $18 billion 10-year Treasury Inflation-Protected

Securities on Thursday.