CORRECTED-TREASURIES-US yields rise as investors brace for volatility, await more Trump policies

Corrects Andy Wells' title to chief investment officer instead of chief executive officer, paragraph 5

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 22 (Reuters) - U.S. Treasury yields were modestly higher in quiet trading on Wednesday, with no clear direction, as investors grew more cautious and 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. The proposed 10% tariffs on Chinese goods, however, were far lower than the 60% duty Trump 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.

Andy Wells, chief investment officer of investment management firm SanJac Alpha LP in Houston, said he thought the trend higher in Treasury yields will continue.

"It makes complete sense considering inflation is persisting. We're looking at 3% inflation instead of 2% and we don't think the Fed (Federal Reserve) will cut rates this year."

"There would be a lot of volatility in the first half," he added. "There would be a lot of whippiness in the yield curve and that means a trend upward in rates."

In afternoon trading, the benchmark Treasury 10-year yield was up 2.7 basis points (bps) at 4.601% US10YT=RR. Since hitting a more than one-year high of 4.809% in mid-January, the 10-year yield has declined more than 20 bps.

U.S. 30-year yields, meanwhile, were up 1.4 bps at 4.817% US30YT=RR.

On the front end, the two-year yield, which is typically tied to the Fed policy outlook, edged higher by 1.2 bps at 4.293% US2YT=RR.

Byron Anderson, head of fixed income at Laffer Tengler Investments in Scottsdale, Arizona, echoed the comments by SanJac's Wells on inflation continuing to trend higher.

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," Laffer's Anderson said.

The U.S. Treasury yield curve on Wednesday, meanwhile, was 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 level 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 on Wednesday, the U.S. Treasury successfully auctioned $13 billion in 20-year bonds, priced at 4.9%, lower than what the market expected at the bid deadline, suggesting solid demand.

The sale's bid-to-cover ratio, another gauge of investor interest, was 2.75, higher than the 2.64 average.

Post-auction, U.S. 20-year yields were up 1.4 bps at 4.889% US20YT=RR.

(Reporting by Gertrude Chavez-Dreyfuss in New York; Editing by Hugh Lawson and Matthew Lewis)

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