TREASURIES-US yields rise on tariff optimism, soft three-year auction

By Karen Brettell

April 8 (Reuters) - Longer-dated U.S. Treasury yields pared an earlier rise on Tuesday but remained higher on the day on greater optimism that President Donald Trump will strike deals with trading partners over tariffs, even as concerns remained that the levies will hurt the U.S. and global economy.

The yields also rose after the U.S. Treasury Department saw tepid demand for a $58 billion auction of three-year notes.

The Trump administration is negotiating trade agreements with countries, including Japan, and Treasury Secretary Scott Bessent said the discussions are the result of multiple calls from other countries and not sliding financial markets.

“Markets seem to be a lot more optimistic. Maybe the deal-making will actually start in terms of trade negotiations,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.

However, “conviction levels are still very, very low. Investors aren't quite sure what to do next, especially if we don't see quite the worst-case scenario on trade that folks were expecting,” Goldberg said.

Meanwhile the United States called China's retaliation against its tariffs a "big mistake" on Tuesday. The United States will impose a 104% tariff on China on Wednesday, a White House official said, after Beijing did not lift its retaliatory tariffs on U.S. goods.

A sharp move higher in Treasury yields on Monday raised speculation that leveraged investors are selling U.S. Treasuries to meet margin calls and de-risk their portfolios due to stock market losses and volatility.

“A lot of times that's a sell what you can, not what you want, type of trade. And a lot of these deleveraging trades tend to hit in almost unclear ways,” Goldberg said. “It makes it very difficult to predict what markets do next.”

Other investors may be taking profits following the recent bond rally. Safe-haven demand for bonds also ebbed as stock markets bounced back from a heavy selloff.

Benchmark 10-year note yields US10YT=RR were last up 5.7 basis points on the day at 4.214%. They fell to 3.86% on Friday, the lowest since October 4.

Interest-rate sensitive two-year yields US2YT=RR were roughly flat at 3.734%. They had reached 3.435% on Monday, the lowest since September 2022.

The yield curve between two- and 10-year note yields US2US10=TWEB steepened to 48 basis points, the steepest since May 2022.

The Treasury sold three-year notes on Tuesday at a high yield of 3.784%, more than two basis points above where they traded before the sale. Demand was 2.57 times the amount of debt on offer, the lowest since October.

The auction was the first of $119 billion in coupon-bearing supply this week.

Demand for longer-dated debt will be tested when the Treasury sells $39 billion in 10-year notes on Wednesday and $22 billion in 30-year bonds on Thursday.

There is some market concern that large foreign holders of Treasuries including China could offload their debt or abstain from new purchases, which could also weigh on the market.

"China is very unlikely to dump its holdings of Treasuries whatever happens in the trade war, as doing so would be self-defeating (e.g., incurring losses on its own portfolio)," John Higgins, chief markets economist at Capital Economics said in a note on Tuesday.

China held $761 billion in Treasuries as of January.