TREASURIES-US yields retreat as Trump may delay tariffs, after solid auction

Rewrites throughout with yields down, adds Trump's new deadline for tariffs, analyst quote, auction result

By Tatiana Bautzer

NEW YORK, Feb 26 (Reuters) - U.S. Treasury yields fell on Wednesday, after trading higher for most of the session, following solid demand for the seven-year note auction and news that potential U.S. tariffs on Mexico and Canada would only take effect on April 2, about a month later than an earlier deadline.

Earlier this month, the Trump administration had set March 4 as the effective date for 25% duties on goods from Mexico and non-energy goods from Canada. U.S. President Donald Trump made the remarks about tariffs during his administration's first cabinet meeting.

In afternoon trading, the yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB fell 4.9 basis points (bps) to 4.258%. The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 1.6 basis points to 4.08%.

Strong demand in the $44 billion seven-year note auction on Wednesday, adding to successful sales of five-year and two-year notes earlier in the week contributed to falling yields on Wednesday, said Eric Jussaume, director of fixed income at Cambridge Trust Wealth Management, a division of Eastern Bank.

Post-auction, U.S. seven-year notes were down 4.9 bps at 4.164% US7YT=RR.

In other parts of the bond market, one segment of the U.S. Treasury yield curve seen by some analysts as a possible recession indicator briefly inverted for the first time this year on Wednesday. The spread between yields on two-year and five-year U.S. Treasuries was last at 0.3 bps.

Markets will look at GDP and durable orders data due on Thursday to see if there are stronger signs of slowdown in the U.S. economy that could accelerate the expected pace of interest rate cuts. A key element for Treasury yields on the near term will be the U.S. Personal Consumption Expenditure (PCE) inflation rate, the Federal Reserve's preferred inflation gauge, to be released on Friday.

"The bond market is still more prone to rallying, as the scenario with potential interest rate cuts later in the year has not changed," said Ralph Axel, interest rates strategist at BofA Securities. Axel cites swap rates that reflect market expectations of a 60-bp rate reduction in 2025.

According to the CME's FedWatch tool, the highest odds for the first 25-bp rate cut are in June's Fed meeting, with a 53% probability. On Wednesday afternoon, the highest probability for a second rate cut was in the September meeting, with 37%.

The House passed late on Tuesday a version of the budget to advance the administration's $4.5 trillion tax-cut plan. The plan calls for spending cuts, but their size and effect on the deficit are still unclear.

"The initial bill passed on the House would increase the deficit," Cambridge Trust's Jussaume said.

Treasury Secretary Scott Bessent said on Tuesday that Trump's economic agenda would help bring down interest rates, particularly on the benchmark 10-year Treasury note, by restoring market confidence in the long-term U.S. fiscal profile.

Padraic Garvey, ING's head of global rates and debt strategy, said investors have yet to see big effects of the savings of the Department of Government Efficiency (DOGE) on spending, and a clear path for deficit reduction. This year, spending has been higher than in the same period a year earlier.