TREASURIES-Yields slip in choppy trading after court blow to Trump tariffs

By Davide Barbuscia

NEW YORK, May 29 (Reuters) - U.S. Treasury yields slipped on Thursday on soft economic data and on the back of a court ruling blocking most of President Donald Trump's tariffs, which initially boosted risk sentiment in markets before reigniting fears over prolonged trade policy uncertainty.

A U.S. trade court blocked most of Trump's tariffs in a sweeping ruling on Wednesday that found the president overstepped his authority by imposing across-the-board duties on imports from U.S. trading partners.

Treasury yields, which rise when prices fall, jumped overnight as U.S. stock futures rallied, but the bond selloff lost steam in early trade on Thursday, with yields then turning lower after the release of weekly jobs data and first-quarter gross domestic product estimates that showed underlying weakness in the economy.

"Overnight, once you first got the news, equity markets took off, yields sold off, then I think there was a more nuanced reaction to it," said Noel McElreath, senior portfolio manager for U.S. fixed income at Xponance.

Economists largely expect tariffs to be a drag on economic growth and to increase price pressures, therefore potential relief from higher import duties would be less inflationary, which would be positive for the bond market. At the same time, lower tariffs than anticipated could reduce revenues, potentially intensifying concerns over the U.S. fiscal health.

For the time being, after the Trump administration filed a notice of appeal and questioned the authority of the court, investors will have to contend with heightened uncertainty over the final shape of U.S. trade policies.

"There's so many pieces up in the air ... It's just more noise and uncertainty," said McElreath.

On the economic front, data from the Labor Department on Thursday showed the number of Americans filing new applications for unemployment benefits increased more than expected last week, while the jobless rate appeared to have picked up in May as labor market conditions continue to ease.

A second reading from the Commerce Department showed gross domestic product contracted 0.2% in the first quarter, less than a 0.3% forecast by economists polled by Reuters, but consumer spending was weaker.

"The data is getting more dovish, even with GDP revised up a bit," David Russell, global head of market strategy at TradeStation, said in a note. "Consumer spending was weaker than expected ... These numbers may increase odds of rate cuts sooner rather than later."

Benchmark 10-year yields US10YT=RR were last at 4.439%, about four basis points down on the day. Two-year yields US2YT=RR stood at 3.949%, over four basis points lower.

Later on Thursday, the Treasury Department will sell $44 billion seven-year notes, the last leg of this week's Treasury auctions. Treasury debt sales this week, which included two-year and five-year notes, have so far been met with good demand despite ongoing worries over lower appetite for Treasuries due to volatile U.S. policymaking.