TREASURIES-Longer-dated U.S. yields reverse declines after German debt brake deal

By Chuck Mikolajczak

NEW YORK, March 4 (Reuters) - Longer-dated U.S. Treasury yields reversed earlier declines on Tuesday, as political parties in Germany reached a deal to overhaul borrowing rules and create a new infrastructure fund.

The parties hoping to form Germany's next government agreed to create a 500 billion euro infrastructure fund and overhaul borrowing rules in a massive spending shift to revamp the military and stimulate Europe's largest economy.

"The fresh spending by Germany would lead to issuance and is somewhat stimulative. So that was definitely one of the factors among a few different things at the same time,” said Dan Mulholland, head of rates - trading & sales, Crews & Associates, New York.

Yields were initially lower and shorted-dated yields remained lower on the day as tariffs by U.S. President Donald Trump on Canada, Mexico and China went into effect, exacerbating concerns about economic growth and boosting expectations for Federal Reserve rate cuts.

"With the tariff conversation, since we've had more of a slowing economic growth story, that picture, combined with the tariffs just now emphasize that more in that direction so now you're getting more rate cuts being priced in," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

Trump's new tariffs of 25% on imports from Mexico and Canada, as well as the doubling of duties on Chinese imports, could rattle the nearly $2.2 trillion in annual trade with the three largest trading partners of the U.S.

China immediately responded with tariffs of 10%-15% on certain U.S. imports from March 10 and a series of new export restrictions for designated U.S. entities. Canadian Prime Minister Justin Trudeau said Ottawa was launching 25% tariffs on C$30 billion ($20.72 billion) worth of U.S. imports, including orange juice, peanut butter and wine, with another C$125 billion of U.S. imports if Trump's tariffs were still in place in 21 days.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 2.6 basis points to 4.206% after earlier falling to 4.106%, its lowest since October 21.

Yields have moved lower recently, with the 10-year yield registering its biggest weekly decline since late November last week, as softening economic data renewed worries about U.S. growth and inflation as Trump had shifted tariff deadlines on Canada and Mexico.

The yield on the 30-year bond US30YT=TWEB rose 5.2 basis points to 4.516%.

Investors are also bracing for the labor market impact from actions by the Department of Government Efficiency (DOGE) under Elon Musk.

A string of reports on the labor market is due to begin on Wednesday and culminate in Friday's government payrolls report.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 25.5 basis points after climbing to 27, a two-week high.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 3.1 basis points to 3.949% after dropping to 3.842%, its lowest since October 4.

Market expectations have been slowly growing the Fed may have the latitude for more rate cuts this year than recently thought due to a slowing economy and are pricing in 71 bps of cuts by the central bank this year, after earlier views saw the Fed reducing rates by less than 50 basis points, according to LSEG data.

Expectations for a cut from the central bank at its May meeting briefly climbed above 50% on Tuesday and last stood at 45%, up from about 26% a week ago, according to CME's FedWatch Tool.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.627% after closing at 2.628% on Monday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.36%, indicating the market sees inflation averaging about 2.4% a year for the next decade.