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

• Uncertainty over trade talks prompts safe-haven demand
• Investors covering shorts after yields hit key levels last week
• Light economic calendar this week
• Yield curve bull flattens

By Davide Barbuscia

NEW YORK, July 21 (Reuters) - U.S. Treasuries rallied on Monday, pushing yields lower, as investors likely unwound short positions amid 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 likelihood 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.

The economic data calendar is light this week, with 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.

Investors also remain alert to speculation around Federal Reserve Chair Jerome Powell's future, after a news report last week that President Trump was planning to oust him before his term ends in May 2026. Trump denied that report but kept blasting Powell for refusing to lower interest rates.

On Monday, U.S. Treasury Secretary Scott Bessent said the entire Federal Reserve needed to be examined as an institution, citing what he called "fear-mongering over tariffs" despite the emergence thus far of little, if any, inflationary effect.

BULL-FLATTENING CURVE

Benchmark 10-year yields US10YT=RR were last at 4.369%, about six basis points lower than on Friday, and 30-year yields US30YT=RR were last at 4.936%, also six bps lower. Two-year yields US2YT=RR, which more closely reflect expectations on changes in monetary policy, were two bps lower at 3.85%.

"The international relaxation at the long-end is sending the domestic yield curve south in bull-flattening fashion, with fixed-income players scooping up maturities across the complex amidst a heavier appetite for duration," said José Torres, senior economist at Interactive Brokers, in a note.

A bull-flattening yield curve occurs when the yield premium of long-term Treasuries over shorter-dated ones diminishes because long-term rates decrease more than short-term rates, a phenomenon that generally indicates expectations of lower long-term inflation allowing the central bank to cut interest rates.

On Monday, the closely-watched yield curve that compares two and 10-year yields flattened to about 51 basis points from 56 bps on Friday.

On the supply front, the Treasury Department will sell $13 billion 20-year bonds on Wednesday and $21 billion 10-year Treasury Inflation Protected Securities on Thursday.

"Wednesday’s 20-year auction of $13 bn will be closely scrutinized once again for any indication of the long-feared buyers’ strike that has thus far failed to materialize," BMO Capital Markets analysts said in a note.

US Treasury yield curve bull flattens