TREASURIES-Tariff optimism, Treasury supply sends yields higher

By Karen Brettell

April 8 (Reuters) - Benchmark 10-year Treasury yields rose to an 11-day high on Tuesday on greater optimism that President Donald Trump will strike deals with trading partners that may limit the expected economic fallout from tariffs and before an auction of the notes on Wednesday.

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.

Yields also got a lift after the U.S. Treasury Department saw soft demand for a $58 billion auction of three-year notes.

That raised concerns that a $39 billion sale of 10-year notes on Wednesday and $22 billion auction of 30-year bonds on Thursday could also have tepid interest.

"We've got the 10-year auction tomorrow, so I think that's keeping some pressure on the market," said Kim Rupert, a managing director at Action Economics.

Tuesday's three-year auction, however, showed pockets of strength, with indirect bidders, which includes foreign central banks, taking a larger-than-normal share of the sale. "Fears of a lack of foreign demand might be allayed a little bit," Rupert said.

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.

There is also 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 held $761 billion in Treasuries as of January.

Concerns about the U.S. fiscal outlook as top Republicans in the House of Representatives plan to move forward this week on Trump's tax cuts are also weighing on longer-dated U.S. debt.

Benchmark 10-year note yields US10YT=RR were last up 8.6 basis points on the day at 4.243%. They fell to 3.86% on Friday, the lowest since October 4.

Interest-rate sensitive two-year yields US2YT=RR reversed an earlier increase and fell 3.3 basis points to 3.705%. They had reached 3.435% on Monday, the lowest since September 2022.

The two-year notes benefited from some safe-haven demand as stock markets gave up earlier gains.

The yield curve between two- and 10-year note yields US2US10=TWEB steepened to 53 basis points, the steepest since February 2022.

The Federal Reserve will release minutes from its March 18-19 meeting on Wednesday.

San Francisco Fed President Mary Daly on Tuesday said with the economy strong and a lot still unclear about the effect of new policies of the Trump administration, the central bank should not rush to adjust interest rates.