TREASURIES-US yields inch up as investors await more Trump policy announcements

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 22 (Reuters) - U.S. Treasury yields were marginally higher in choppy trading on Wednesday with no firm direction, as investors awaited more announcements from the new administration about policies on tariffs, immigration, and tax cuts.

U.S. President Donald Trump on Tuesday vowed to hit the European Union with tariffs and said his administration was discussing a 10% punitive duty on Chinese imports because fentanyl is being sent from China to the U.S. via Mexico and Canada. However, that 10% tariff was way lower than the 60% duty he promised during his campaign.

On Monday, Trump said he was thinking of imposing 25% tariffs on imports from Canada and Mexico from Feb. 1.

The tariff threats have left the bond market in limbo and traders increasingly puzzled by the delay in action. Market participants overall were hesitant to make big bets unless Trump makes more definitive policies.

"This is the lull in the storm. We had a lot of pressure on the bond market and they sold off and we think inflation is still going to trend higher," said Byron Anderson, head of fixed income at Laffer Tengler Investments in Scottsdale, Arizona.

He cited Trump's aggressive stance on immigration as a potential headwind for the Federal Reserve's goal of bringing inflation down to the 2% average.

Trump on Monday kicked off his sweeping immigration crackdown, tasking the U.S. military with aiding border security, issuing a broad ban on asylum and taking steps to restrict citizenship for children born on U.S. soil.

"Depending on the deportations, and what that number actually looks like, you could put pressure on the employment market and we could see a spike in wage growth," Anderson said.

"That's an extreme measure. They would have to deport 5 million to get that to happen. Right now, all of these things are unknown," he added.

In mid-morning trading, the benchmark Treasury 10-year yield was up 1.3 basis points (bps) at 4.587% US10YT=RR. Since hitting a more than one-year high of 4.809% in mid-January, the 10-year yield has declined nearly 23 basis points (bps).

U.S. 30-year yields, meanwhile, was flat at 4.804% US30YT=RR.

On the front end, the two-year yield, which reflects interest rate expectations, was little changed at 4.283% US2YT=RR.

The U.S. Treasury yield curve on Wednesday was also little changed, with the gap between two-year and 10-year Treasury yields at 30 bps US2US10=TWEB. On Tuesday, the curve hit its flattest since late December of 27.8 bps.

BMO Capital Markets analysts, in a research note, said the flattening could be a "modest retracement of the bear steepening that has represented the 'go-to' Trump trade in the U.S. rates market."

"While we are unquestionably on board with the bounce in Treasuries, there remains the lingering question: how far can the price action reverse in light of the inflationary angst that brought the market to the yield peaks seen last week?"

Also later on Wednesday, the Treasury will auction $13 billion in 20-year bonds. J.P. Morgan analysts said they expect the sale to be absorbed by the market "given elevated yield levels and slightly cheap valuations."

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Hugh Lawson)

((gertrude.chavez@thomsonreuters.com; 646-301-4124))