TREASURIES-US yields climb on trade talk optimism, solid economic data

By Davide Barbuscia

NEW YORK, July 24 (Reuters) - U.S. Treasury prices declined on Thursday as a trade deal with Japan and expectations of a similar agreement with Europe could soften the economic blow of steep import duties that President Donald Trump planned to impose on large U.S. trade partners.

Better-than-feared prospects for trade negotiations ahead of an August 1 tariff deadline reduced investor demand for safe-haven assets such as Treasuries. U.S. economic data on Thursday also pointed to a resilient labor market, further lifting Treasury yields, which move inversely to prices.

"Some of the bigger fears around tariffs pushing inflation higher, or the U.S. economy crumbling ... I think for each week that goes by there's increasing comfort that perhaps those tail risk scenarios are less likely to play out," said Anders Persson, chief investment officer and head of global fixed income at Nuveen.

Trump announced a trade deal with Japan this week that lowers tariffs on auto imports to 15% and spares Tokyo from punishing new levies on other goods. Meanwhile, the European Commission said on Thursday a negotiated trade solution with the United States was within reach.

Progress on trade agreements has also raised market hopes on trade talks with China. Treasury Secretary Scott Bessent said this week U.S. and Chinese officials would meet in Stockholm next week to discuss an extension to the deadline for negotiating a trade deal.

On the economic front, the number of Americans filing new applications for jobless benefits fell to a three-month low last week, the Labor Department said on Thursday, pointing to stable labor market conditions. U.S. business activity picked up in July, according to a survey from S&P Global on Thursday.

Treasury yields inched higher after the data releases.

"There's some recognition or acknowledgment that the global economies are holding up reasonably well, that there is perhaps less urgency for the Federal Reserve to be cutting rates," said Persson at Nuveen.

Fed policymakers will meet next week but the market is not expecting changes to interest rates at that meeting. Rates futures traders are betting on a total of nearly two 25-basis point rate cuts by the end of this year.

Trump, who has repeatedly blasted Fed Chair Jerome Powell for keeping interest rates elevated, will visit the central bank later on Thursday in a surprise move that escalates tension between the administration and the Fed.

Investors remain alert to speculation on Powell's future, after a news report last week, denied by Trump, that he was planning to oust Powell before his term ends in May 2026.

Bond price action on Thursday, however, suggested the market was not anticipating that scenario. A removal of Powell would likely push short-term yields lower on expectations of a more dovish Fed Chair after Powell, but two-year yields on Thursday were rising in line with other maturities.

Benchmark 10-year yields US10YT=RR were last at 4.413%, about two and a half basis points higher on the day. Two-year yields US2YT=RR were last up by roughly the same amount at 3.908%.

Later on Thursday, the Treasury Department will sell 10-year Treasury Inflation-Protected Securities worth $21 billion. While tariff-driven inflation concerns could be supportive, the auction is the largest on record for 10-year TIPS, which could weigh on demand, BMO Capital Markets analysts said in a note.