TREASURIES-Yields fall as bond market shows signs of stabilizing

By Karen Brettell

April 10 (Reuters) - U.S. Treasury yields dipped on Thursday, after a solid 10-year note auction and pause in some trade tariffs on Wednesday helped the market stabilize from a sharp bond market selloff earlier this week.

Yields also briefly added to the move after data on Thursday showed that consumer price inflation unexpectedly fell in March.

The bond market was roiled earlier this week with rapid yield increases that analysts attributed to large liquidations as hedge funds and other asset managers unwound trades and sold assets due to margin calls and losses.

Concerns have also grown that a large holder of Treasuries such as China may be unloading some of their portfolio as a trade war between China and the United States intensifies.

Risk sentiment improved, however, after the Treasury Department saw strong demand for Wednesday's $39 billion 10-year debt auction and after U.S. President Donald Trump said he would temporarily walk back the hefty duties he had just imposed on dozens of countries while further ramping up pressure on China.

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, noted that swap spreads, which have been watched as a sign of the deleveraging of basis trades, have moved back from their wider levels. USDSR10YOTS=TWEB

“If we get some further relief on that, I think the fixed income markets will gradually trade a little bit more normally,” he said.

Basis trades are a popular strategy by hedge funds and other asset managers that seek to profit from the difference between cash Treasuries and Treasury futures prices.

A $22 billion auction of 30-year bonds later on Thursday, however, remains a risk to the market, with the maturity being especially volatile this week as demand for longer-dated debt fell.

The deleveraging process is also likely not fully completed, leaving the market open to possibly renewed bouts of volatility.

“There are a handful of leftover entities that haven't quite deleveraged and need to finish up that process,” LeBas said.

Meanwhile, yields briefly extended their move lower after data showed that the consumer price index dipped 0.1% last month after gaining 0.2% in February. Excluding the volatile food and energy components, the CPI gained 0.1% in March after climbing 0.2% in February.

Other data showed that the number of Americans filing new applications for unemployment benefits rose slightly last week.

The 10-year note yield US10YT=RR was last down 4.7 basis points on the day at 4.349%.

Thirty-year bond yields US30YT=RR gained 0.8 basis points to 4.780%.

The interest-rate sensitive two-year yield US2YT=RR fell 8.1 basis points to 3.868%.

The yield curve between two- and 10-year note yields US2US10=TWEB steepened by around 6 basis points to 48 basis points.