TREASURIES-Yields ease as buyers reappear after 30-year hits 19-month high

By Karen Brettell

NEW YORK, May 22 (Reuters) - U.S. Treasury yields fell on Thursday after a recent selloff drew some buyers at more attractive levels, with 30-year yields earlier reaching the highest in 19 months as a worsening fiscal outlook for the United States raised concerns about demand for U.S. government debt.

Yields initially rose after the Republican-controlled U.S. House of Representatives on Thursday passed a sweeping tax and spending bill that would enact much of President Donald Trump's policy agenda and saddle the country with trillions of dollars in debt.

Soft demand for a $16 billion sale of 20-year bonds on Wednesday also increased concerns about falling interest in U.S. debt. The auction was the first since Moody’s Investors Service cut the United States sovereign rating from the top “Aaa” on Friday.

“You've had a variety of factors that seem to be calling into question demand for longer duration Treasuries and maybe demand for longer duration sovereign bonds,” said Zachary Griffiths, head of IG and macro strategy at CreditSights.

But yields fell back from their highs later on Thursday as some buyers emerged. Benchmark 10-year yields and 30-year yields have both risen by around 50 basis points this month.

The Treasury saw average demand for a $18 billion sale of 10-year Treasury Inflation-Protected Securities on Thursday.

They debt sold at a high yield of 2.22%, around half a basis point higher than where it traded before the sale. Demand was 2.36 times the amount of debt on offer.

U.S. Federal Reserve Governor Christopher Waller also said on Thursday he still sees a path to rate cuts later this year, but noted that the outlook depends on where the Trump administration’s tariff policy settles out.

Fed funds futures traders see the Fed as most likely to resume rate cuts in September.

The market may need to see something significant in terms of the economy or supply for any yield declines to be long lasting.

"The Treasury market is looking for a circuit breaker," said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.

"This can come in the form of poor labor market data to bring forward Fed cuts and trigger a reassessment of the strength of the economy. Or a change in the Treasury’s financing strategy that skews issuance of towards Treasury bills and intermediate maturity bonds," he said.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, was last down 1.9 basis points at 3.999%.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 4.6 basis points to 4.551%, after earlier reaching 4.629%, the highest since February 12.

The yield curve between two-year and 10-year notes US2US10=TWEB flattened 3 basis points to 55 basis points.

The 30-year bond US30YT=RR yield fell 2.6 basis points to 5.063% and earlier hit 5.161%. It is close to October 2023's high of 5.179%, a break past which would take it to its highest since mid-2007.

Inflation fears have weighed on longer-dated debt demand as the Trump administration continues to work on trade deals that will maintain tariffs, but in most cases below the levels that were initially implemented.

Japanese government bond yields have also surged following a weak 20-year Japanese debt auction earlier this week. That has raised concerns that Japanese investors will move away from Treasuries as Japanese bonds become more attractive from a yield perspective.

Fiscal and debt supply concerns have come to the fore in a week that is otherwise light on major economic releases to drive market direction.

Data on Thursday showed that the number of Americans filing new applications for unemployment benefits dropped last week, suggesting the economy maintained a steady pace of job growth in May.