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Uncertainty over trade talks prompts safe-haven demand

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Investors covering shorts after yields hit key levels last

week

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Light economic calendar this week

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Yield curve bull flattens

(Adds context, analyst comments, graphic; updates yields)

By Davide Barbuscia

NEW YORK, July 21 (Reuters) - U.S. Treasuries rallied on

Monday, pushing yields lower, as investors likely unwound short

positions amid uncertainty over the economic fallout from U.S.

tariffs.

U.S. President Donald Trump is pushing for a minimum tariff

of 15% to 20% in any trade deal with the European Union, the

Financial Times reported on Friday, up from a 10% level that

appeared to be a likely outcome in trade negotiations ahead of

an August 1 U.S. tariff deadline.

Meanwhile, the European Union is exploring a broader set of

possible counter-measures against the U.S. as prospects for an

acceptable trade agreement with Washington fade, according to EU

diplomats.

The likelihood of higher than anticipated tariffs, which

economists largely see as a drag on the global economy,

contributed to some demand for European and U.S. government

bonds on Monday.

"There is a little bit of concern about tariffs and the

August 1 tariff date, there's at least some discussion about the

risks and some speculation that's attracting some safe-haven

demand," said John Canavan, lead U.S. analyst at Oxford

Economics.

Demand for Treasuries also likely came from investors who

had previously bet that bond prices would fall, by taking short

positions, and on Monday were buying bonds to close those bets,

after Treasury yields reached key resistance levels last week of

around 4.5% for benchmark 10-year yields and just above 5% for

30-year yields.

"Throughout last week, those levels held firm ... Market

participants are seeing that stability and that demand at those

key technical levels and seeing that as an opportunity to cover

some short positions," said Canavan.

The economic data calendar is light this week, with main

indicators including regional manufacturing surveys on Tuesday,

existing home sales on Wednesday, new home sales, jobless

claims, and the Chicago Fed survey on Thursday, followed by

durable goods orders on Friday.

That is expected to leave room for bond prices to react to

trade negotiation developments.

Investors also remain alert to speculation around

Federal Reserve Chair Jerome Powell's future, after a news

report last week that President Trump was planning to oust him

before his term ends in May 2026. Trump denied that report but

kept blasting Powell for refusing to lower interest rates.

On Monday, U.S. Treasury Secretary Scott Bessent said the

entire Federal Reserve needed to be examined as an institution,

citing what he called "fear-mongering over tariffs" despite the

emergence thus far of little, if any, inflationary effect.

BULL-FLATTENING CURVE

Benchmark 10-year yields were last at 4.369%,

about six basis points lower than on Friday, and 30-year yields

were last at 4.936%, also six bps lower. Two-year

yields, which more closely reflect expectations on

changes in monetary policy, were two bps lower at 3.85%.

"The international relaxation at the long-end is sending the

domestic yield curve south in bull-flattening fashion, with

fixed-income players scooping up maturities across the complex

amidst a heavier appetite for duration," said José Torres,

senior economist at Interactive Brokers, in a note.

A bull-flattening yield curve occurs when the yield

premium of long-term Treasuries over shorter-dated ones

diminishes because long-term rates decrease more than short-term

rates, a phenomenon that generally indicates expectations of

lower long-term inflation allowing the central bank to cut

interest rates.

On Monday, the closely-watched yield curve that compares

two and 10-year yields flattened to about 51 basis points from

56 bps on Friday.

On the supply front, the Treasury Department will sell $13

billion 20-year bonds on Wednesday and $21 billion 10-year

Treasury Inflation Protected Securities on Thursday.

"Wednesday's 20-year auction of $13 bn will be closely

scrutinized once again for any indication of the long-feared

buyers' strike that has thus far failed to materialize," BMO

Capital Markets analysts said in a note.