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US 10-year, two-year yields slip but tariff threat lingers

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Markets price in 39 bps of Fed easing in 2025

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Trump says he may impose tariffs on Canada, Mexico next

month

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US 2/10 yield curve flattens, hits narrowest gap since

late

December

(Adds new comment, NEW YORK dateline, byline, updates prices)

By Gertrude Chavez-Dreyfuss and Ankur Banerjee

NEW YORK/SINGAPORE, Jan 21 (Reuters) - U.S. Treasury

yields on most maturities fell on Tuesday after President Donald

Trump refrained from imposing tariffs on his first day in

office, although he said imports from Canada and Mexico may get

some duties on Feb. 1.

U.S. yields, from two-year notes to 30-year bonds, slid to

their lowest since early January, continuing a trend that

started last week with tepid consumer prices data for December.

In his inauguration speech on Monday, Trump declared

immigration and energy emergencies, but only briefly mentioned

tariffs and issued a memo that directed agencies to investigate

and remedy persistent trade deficits.

That stoked expectations that the new administration will

adopt a gradual approach to tariffs, sparking a short-lived

relief rally in most non-U.S. dollar currencies. Stock futures

also soared before fresh comments from Trump jolted the markets.

Trump said later on Monday he was thinking about imposing

25% tariffs on imports from Canada and Mexico as soon as Feb. 1,

without offering details. The president also said he wanted to

reverse the U.S. trade deficit with the European Union, either

with tariffs or more energy exports.

"Trump overall was very light on tariffs and that's why

Treasury yields are lower. A lot of the fast money accounts have

been short Treasuries and so we might see a reversal this week

to lower yields," said Tom di Galoma, managing director & head

of fixed income trading, at Curvature Securities in Park City,

Utah.

"He's being very careful on the tariffs and he doesn't want

to upset the markets, but we all know what he's going to do at

some point. Trump just didn't do it on day one."

Market ructions in the wake of Trump's comments were mainly

felt in currencies.

"Our view remains that tariffs are a negotiating tool, and

we should see more headlines over the coming days," said Mohit

Kumar, chief economist, Europe, at Jefferies. "Eventually, it is

likely that Trump refrains from imposing the intended 25%

tariffs."

In mid-morning trading, the yield on the benchmark U.S.

10-year Treasury note sagged 4.9 basis points to

4.562%, after touching a more than two-week low of 4.53%. The

yield on the 30-year bond fell 6.3 bps to 4.782%,

also hitting a two-week trough of 4.776%.

On the short end of the curve, the two-year U.S.

Treasury yield, which typically moves in step with interest-rate

expectations, was little changed at 4.272%. Earlier, the yield

touched its lowest since Jan. 2 at 4.219%.

The U.S. Treasury yield curve on Tuesday, meanwhile, reduced

its steepness and showed what traders call a "bull flattening,"

where long-term interest rates are falling faster than

shorter-dated ones. The gap between two-year and 10-year

Treasury yields narrowed to 29 bps, the flattest

since late December, and down from 33.8 bps late on Friday.

The curve reflects lower inflation expectations, with the

market viewing a gradual approach on tariffs as reducing price

pressures. A bull flattener typically precedes the Fed lowering

short-term interest rates.

Concerns over price pressures also eased modestly amid

weakening oil prices after Trump announced drilling plans to

boost U.S. crude oil and gas production. That also weighed on

Treasury yields.

Brent crude futures were last down 1.4%, at $79.04

per barrel, while U.S. West Texas Intermediate crude futures

dropped 2.2% at $76.17.

The Federal Reserve last month shocked the market by

projecting just two rate cuts in 2025, down from four predicted

previously, due to worries over inflation and uncertainties

surrounding the Trump administration's election pledges.

Analysts have said that Trump's policies on immigration, tax

and tariffs will likely boost growth but also be inflationary.

The Fed is expected to hold rates steady this month but keep

a wary eye on inflation. Markets price in about 39 basis points

of easing this year, roughly unchanged from Friday's estimates,

according to LSEG calculations