TREASURIES-Yields mixed after Trump's latest pivot on Fed, tariffs

By Davide Barbuscia

NEW YORK, April 23 (Reuters) - U.S. Treasury yields were mixed on Wednesday as Washington signalled an openness to de-escalating the trade war with China and U.S. President Donald Trump backed off his attacks on the Federal Reserve.

Trump stepped back from his threats to fire Fed Chair Jerome Powell on Tuesday, after days of criticising Powell's reluctance to lower interest rates.

Treasury Secretary Scott Bessent said on Tuesday that tensions between the U.S. and China over trade may soon ease, although on Wednesday he said tariffs would need to come down before trade talks could start.

The relatively soothing signals from the Trump administration gave fleeting relief to the Treasury market.

"If there is a more friendly outcome to the tariffs, we would expect we're still in a slower growth trajectory and that the one-time inflation shock (from tariffs) would be less," said Stephen Cianci, senior portfolio manager at DWS Group.

"That would probably give visibility to the Fed to potentially begin to re-engage in cutting," he said, adding he expected the Fed to lower interest rates twice this year.

Benchmark 10-year yields - which move inversely to prices - declined meaningfully earlier on Wednesday, in a partial reversal of the concerns that gripped investors over the past few weeks because of Trump's seemingly erratic trade and economic policies.

The bond rally, however, lost some steam during the day as economic data released on Wednesday was mixed, with some surprises to the upside.

A survey from S&P Global showed U.S. business activity slowed to a 16-month low in April and prices charged for goods and services soared amid tariff uncertainty. The survey's flash manufacturing PMI, however, edged up to 50.7 from 50.2 in March. Economists polled by Reuters had forecast the manufacturing PMI would decline to 49.1.

A U.S. Department of Commerce reading of home sales for March was also stronger than anticipated.

Benchmark 10-year Treasury yields US10YT=RR were last at 4.385%, a touch lower than on Tuesday. Further out, 30-year yields declined by about five basis points to 4.83%.

Two-year yields US2YT=RR added six bps and were last at 3.859%. The closely watched yield curve that plots two-year yields against 10-year yields flattened to 53 bps, after hitting an over three-year high of about 65 bps on Monday.

"Trump is finding a way off the ledge he put himself on with the tariffs, and he's trying to get out of this," said Stan Shipley, fixed-income strategist at Evercore ISI in New York. "If he's successful doing that, then growth should be better ... especially as you have tax cuts coming in 2026," he added.

Still, some market participants cautioned that volatile U.S. policymaking could keep investors on edge.

"The perception of U.S. Treasuries and the dollar has changed," said Justin Onuekwusi, chief investment officer at investment firm St. James's Place.

"If you have politicians and policymakers making decisions out of the norm, some will look at this and say this is going to be more volatile and hold less of that asset," he added.

The 10-year Treasury term premium, a measure of the compensation investors demand for the risk of holding long-dated U.S. government debt, stood at 77 bps as of Tuesday, according to the latest available data by the Federal Reserve Bank of New York. That was a few basis points below Monday's levels, when the measure hit its highest since 2014.

On the supply front, the Treasury Department sold $70 billion in five-year notes on Wednesday with a high yield of 3.995%, about half a basis point below where the market was at the time of bidding, in a sign investors were eager to accept a yield below market rates to get the securities.

The debt sale came after a soft two-year note auction on Tuesday.