*

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

lingers

*

Markets price in 38 bps of Fed easing in 2025

*

Trump says he may impose tariffs on Canada, Mexico next

month

*

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

December

(Adds analyst comment, graphics, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, 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, earlier

slid to their lowest since early January, before those on the

short end recovered. The fall in yields continued a downtrend

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.

But 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.

"This is typical of what we're going to see: there's a lot

of rhetoric and talk about policies or upcoming policies, or

policy intentions. But the reality is all about the actual

implementation," said Thomas Urano, co-chief investment officer,

at Sage Advisory in Austin.

"There was speculation over the weekend that Trump will

not actually go with Day One tariffs and of course we didn't see

that. So the market has been good (yields lower) and the CPI

number (last week) has been very helpful."

Market ructions in the wake of Trump's comments were

mainly felt in currencies.

In afternoon trading, the yield on the benchmark U.S.

10-year Treasury note sagged 3.7 basis points (bps)

to 4.574%, after touching a more than two-week low of 4.53%. The

yield on the 30-year bond fell 4.2 bps to

4.803%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 up 1.1 bps at 4.281%. 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 27.8 bps, the

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

The curve reflects lower inflation expectations, analysts

said, 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.

"I don't know if Treasury yields go crashing lower from here

without a pretty sharp slowdown in the economy," said Sage's

Urano. "I think 10-year yields are fairly valued in the mid-4%

range."

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, analysts said.

Brent crude futures were last down 0.9%, at $79.46

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

dropped 2.3% to $75.89.

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 38 basis points

of easing this year, that will likely resume again at the June

meeting, according to LSEG calculations.