TREASURIES-Prices dip on US-UK trade deal optimism, ahead of 30-year auction

By Gertrude Chavez-Dreyfuss

NEW YORK, May 8 (Reuters) - U.S. Treasuries slipped on Thursday, pushing yields higher, amid optimism surrounding a trade deal between the United States and Britain that could serve as a model for other tariff agreements.

Technical factors leading to a 30-year bond auction later in the session also weighed on Treasury prices.

The U.S. and UK simultaneously announced a deal to lower tariffs on some goods on Thursday, the first such agreement since President Donald Trump sparked a global trade war with the imposition of import duties around the world.

The wide-ranging agreement includes concessions on cars, steel, beef and ethanol, among others, that would generate $6 billion for the United States in tariff revenue and $5 billion in new export opportunities. At the same time, Britain gave the U.S. access to agricultural markets, with the deal creating an aluminum and steel trading zone and securing the pharmaceutical supply chain.

U.S. Commerce Secretary Howard Lutnick said the UK will also buy $10 billion of Boeing planes.

In late morning trading, the benchmark 10-year yield US10YT=RR rose 4.7 basis points (bps) to 4.319%. On the front end of the curve, the two-year yield US2YT=RR, which reflects interest rate expectations, advanced 5 bps to 3.843%.

"I think there is optimism that this could be a template for other deals to come, however, this is not the trade deal that is going to dramatically change how the U.S. economy responds," said Will Compernolle, macro strategist at FHN Financial in Chicago.

"As I see it, this is one of the easier deals to make. The UK really relies on the U.S. The U.S. has also a trade surplus and what the UK exports are services which aren't even impacted by tariffs."

The announcement comes a day after the Federal Reserve held interest rates, as expected, but noted that the risk of higher inflation and unemployment had increased.

Fed Chair Jerome Powell, in a press conference after the U.S. central bank's policy meeting, emphasized the high degree of uncertainty arising from the Trump administration's tariffs and noted that the Fed cannot be pre-emptive when it comes to monetary policy.

Treasuries rallied after the Fed statement and during Powell's press conference, as the market took the statement as flagging stagflation, a low growth, high inflation scenario. On Thursday, that rally is being unwound.

"It's kind of all noise to me right now," said FHN's Compernolle. "Remember that after an FOMC meeting, people are taking a breath and digesting what happened."

Investors are looking to the sale of $25 billion in 30-year bonds later on Thursday, following successful auctions of three-year and 10-year notes earlier in the week.

It's also one of the reasons Treasuries are selling off a little bit, as investors are in so-called "concession" mode, where they tend to sell Treasuries so they can buy them back at a lower price at the auction.

JP Morgan, in a research note, said it expects the auction to be absorbed smoothly with valuations appearing attractive for the 30-year and with the Fed out of the way.

Ahead of the auction, U.S. 30-year yields, which move inversely to prices, edged up 2.7 bps to 4.797% US30YT=RR.

Earlier in the session, Treasuries showed little reaction to data showing initial jobless claims dropped by 13,000 to a seasonally adjusted 228,000 for the week ended May 3. Economists polled by Reuters had forecast 230,000 claims for the latest week.

A separate report showed nonfarm productivity, which measures hourly output per worker, fell at a 0.8% annualized rate in the first quarter. That was the first decline since the second quarter of 2022 and followed a 1.7% growth pace in the October-December quarter.