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Yields inch higher on possible tariff exemptions

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Fed officials indicate patience as tariff impact uncertain

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Quarter-end rebalancing adds selling pressure

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February reading of durable goods orders better than

forecast

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Five-year auction meets lukewarm demand

(Writes through, updates market levels, adds analyst and

investor quotes)

By Davide Barbuscia

NEW YORK, March 26 (Reuters) - U.S. Treasury yields

inched higher on Wednesday as investors weighed potential

exemptions from U.S. President Donald Trump's tariffs and

Federal Reserve officials signaled a patient approach to

interest rate cuts.

Trump indicated on Monday that not all of his threatened

levies would be imposed on April 2 and some countries may get

breaks. This has given some reprieve this week to investors

rattled by the expected inflationary impact and hit on U.S.

growth from aggressive U.S. trade policies.

Still, uncertainty around U.S. import levies gripped

markets again on Wednesday as Trump prepared to announce

tariffs on the auto industry

later in the day.

"This psychological churn is, I expect, what we'll see

at least until that April 2 date, but probably even beyond,

because there's so many moving parts. We have all the macro data

and we have all the tariffs uncertainty," said Mark Hackett,

chief market strategist at Nationwide.

Yields, which move inversely to prices and tend to rise

on expectations of higher growth and inflation, edged higher,

with the benchmark 10-year yields last at 4.34%, up

3-1/2 basis points from Tuesday. Two-year yields were

last at 4.01%, one basis point higher.

St. Louis Fed President Alberto Musalem said on

Wednesday the Fed had no urgency to cut rates given ongoing

growth, and cautioned that tariffs could trigger more persistent

price pressures. Minneapolis Fed President Neel Kashkari said

the Fed should stay put amid continued policy uncertainty and

the effect of tariffs on the economy.

"Markets are still trying to unpack ... the fear of

higher inflation related to potential tariffs, but the Fed is

seemingly remaining patient because the data is not showing that

high inflation yet, even though there's so many expectations for

it," said Joe Bell, chief investment officer at Meeder

Investment Management.

On the economic data front, the February reading of

durable goods orders, released by the U.S. Commerce Department

on Wednesday, was stronger than anticipated. New orders for key

U.S.-manufactured capital goods unexpectedly fell in February.

Wednesday's data followed the release of a Conference Board

survey on Tuesday showing U.S. consumer confidence plunged to

the lowest level in more than four years this month, with

households fearing a coming recession.

BofA Securities analysts said in a note on Wednesday

that U.S. Treasury yields remained stuck between two opposing

themes: they have adjusted lower in recent weeks to account for

heightened growth concerns stemming from tariff uncertainty. At

the same time, economic fundamentals have held firm, and

inflation risks remain high.

Portfolio reallocations in the last days of the quarter,

when money managers adjust portfolios to account for the

quarter's moves in stocks and bonds, may have also added some

selling pressure, said Tony Farren, managing director at

Mischler Financial Group.

"That trade has started, it's not something you can do just

the last day of the quarter ... you have to ease your way into

it," he said, talking about investors selling bonds for stocks.

The Treasury sold $70 billion in five-year notes on

Wednesday in an auction to lukewarm demand. The 4.1% yield was

marginally above market at the bidding deadline, suggesting

investors demanded higher compensation to absorb them.

The bid-to-cover ratio, a measure of demand, was 2.33

times, the lowest since May 2024.