Yields dip as Japan's possible bond shift eases supply worries

• Japan mulls cut to long-dated bond issuance
• Euro area bond yields drop after weak French inflation data
• Orders for durable goods drop less than anticipated
• Two-year auction well received

NEW YORK, May 27 (Reuters) - U.S. Treasury yields declined on Tuesday as concerns over rising global government debt supply, which lifted bond yields last week, were partly eased by expectations that Japan could issue less longer-dated debt.

Japan is mulling a cut to super-long bond issuance, sources told Reuters on Tuesday, as policymakers seek to soothe market concerns about worsening government finances. Expectations for a change in long-dated debt supply sent Japanese bond yields tumbling. This rippled across markets, dragging down the yen and U.S. Treasury yields.

Further easing pressure on long global bonds, Britain's debt management chief Jessica Pulay told the Financial Times the UK had pivoted to shorter-term borrowing this year. Euro area bond yields dropped on Tuesday after French inflation data came in weaker than expected.

"This is definitely a step in the right direction," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale, in reference to news from Japan. "A lot of the pressure last week, especially after the 20-year (Treasury) auction, was much more of a global move than anything specific to the U.S.," she said.

Demand was soft for the U.S. Treasury Department's $16 billion sale of 20-year bonds last week, as investors worried about the country's increasing debt burden and rising global debt.

However, demand for long-dated debt has apparently remained steady when yields have risen to key levels, said Craig Brothers, a fixed income portfolio manager at Bel Air Investment Advisors, referring to the 5% area for 30-year yields and above 4.5% for 10-year yields.

"As much as one can find all of the negatives about the amount of debt that needs to roll over and the lack of foreign buying ... the fact you're getting to buy at yields you haven't seen for such a long time, I think that's really a positive backdrop," he said.

On Tuesday, the Treasury sold $69 billion in two-year notes, the first of three auctions this week with $70 billion and $44 billion in five- and seven-year notes due on Wednesday and Thursday.

The two-year auction was well received, with a high yield of 3.955%, about nine basis points below the market at the time of the bidding deadline.

TARIFFS

Investors were dealing with continued uncertainty over U.S. trade policies after President Donald Trump's latest change on tariffs.

On Sunday, Trump rolled back his threat to impose 50% tariffs on imports from the EU next month, restoring a July 9 deadline to allow for talks. This boosted stocks on Tuesday as markets reopened after the Memorial Day break.

"The reality remains that investors are nervous that the trade war will materially undermine demand for U.S. Treasuries from overseas investors and the question is how significant of an impact that will have on U.S. rates," BMO Capital Markets analysts said in a note on Tuesday.

Economic data on Tuesday painted a mixed picture.

U.S. consumer confidence improved in May after deteriorating for five straight months amid a truce in the U.S.-China trade war, the Conference Board Consumer Confidence index showed.

Meanwhile, the Commerce Department reported that new orders for key U.S.-manufactured capital goods plunged in April.

Orders for durable goods, ranging from toasters to aircraft meant to last three years or more, dropped 6.3% last month after a slightly upwardly revised 7.6% rise in March. The drop was lower than anticipated, however.

Federal Reserve Bank of Minneapolis President Neel Kashkari on Tuesday called for keeping interest rates steady until there is more clarity on how higher tariffs affect inflation.

Richmond Fed President Thomas Barkin said recent economic data have not indicated if the U.S. economy was turning towards higher price pressures or more unemployment.

The benchmark 10-year yield US10YT=RR was last at 4.429%, about eight basis points lower than on Friday, while the 30-year yield US30YT=RR fell about 10 basis points to 4.935%.

Two-year yields US2YT=RR were two bps lower at 3.965%.

US consumer confidence