TREASURIES-US government bonds rally on short covering, tariff concerns

By Davide Barbuscia

NEW YORK, July 21 (Reuters) - U.S. Treasuries rallied on Monday, pushing yields lower, as investors likely unwound short positions and followed a broader rally in European sovereign bonds fueled by uncertainty over the economic fallout from U.S. tariffs.

U.S. President Donald Trump is pushing for a minimum tariff of 15% to 20% in any trade deal with the European Union, the Financial Times reported on Friday, up from a 10% level that appeared to be a likely outcome in trade negotiations ahead of an August 1 U.S. tariff deadline.

Meanwhile, the European Union is exploring a broader set of possible counter-measures against the U.S. as prospects for an acceptable trade agreement with Washington fade, according to EU diplomats.

The prospect of higher than anticipated tariffs, which economists largely see as a drag on the global economy, contributed to some demand for European and U.S. government bonds on Monday.

"There is a little bit of concern about tariffs and the August 1 tariff date, there's at least some discussion about the risks and some speculation that's attracting some safe-haven demand," said John Canavan, lead U.S. analyst at Oxford Economics.

Demand for Treasuries also likely came from investors who had previously bet that bond prices would fall, by taking short positions, and on Monday were buying bonds to close those bets, after Treasury yields reached key resistance levels last week of around 4.5% for benchmark 10-year yields and just above 5% for 30-year yields.

"Throughout last week those levels held firm ... Market participants are seeing that stability and that demand at those key technical levels and seeing that as an opportunity to cover some short positions," said Canavan.

On the economic data front, the calendar is light this week, with the main indicators including regional manufacturing surveys on Tuesday, existing home sales on Wednesday, new home sales, jobless claims, and the Chicago Fed survey on Thursday, followed by durable goods orders on Friday.

That is expected to leave room for bond prices to react to trade negotiation developments as well as ongoing speculation over the future of Federal Reserve Chair Jerome Powell after a news report last week that President Trump planned to remove him before the end of his term in May 2026. Trump denied that report last week but continued to criticize Powell for not lowering interest rates.

On Monday, U.S. Treasury Secretary Scott Bessent said the entire Federal Reserve needed to be examined as an institution and whether it had been successful. Speaking with CNBC, he declined to comment on a report that he had advised Trump not to fire Powell.

Benchmark 10-year yields US10YT=RR were last at 4.356%, about seven basis points lower than on Friday, while 30-year yields US30YT=RR were about eight bps lower at 4.915%. Two-year yields US2YT=RR, which more closely reflect expectations on changes in monetary policy, were three bps lower at 3.846%.