TREASURIES-US bonds rebound as investors reassess fallout from tariff ruling

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 23 (Reuters) - U.S. Treasuries recovered on Monday after a selloff in the previous session, as investors pondered the implications of the Supreme Court's Friday decision to strike down President Donald Trump's sweeping use of emergency powers to impose tariffs.

The ruling has injected fresh uncertainty in the bond market and heightened volatility.

U.S. government bonds had tumbled on Friday, with market participants moving away from Treasuries on concerns that refunding tariff revenue to businesses -- a likely consequence of the ruling -- would compel the Treasury to offset the shortfall with higher debt issuance. That adds incremental supply to a market already sensitive to deficit dynamics.

Friday's selling of Treasuries pushed two-year yields to their largest weekly increase in 2-1/2 months, reflecting expectations that short-term borrowing costs might remain elevated. The benchmark 10-year yield had also advanced on Friday, logging its biggest weekly rise in more than a month and highlighting a broad re-evaluation of term premiums.

On Monday, that selloff reversed as investors grabbed Treasuries, shunning risk overall, given renewed ambiguity over the direction of the administration's trade policy. The shift underscored how quickly sentiment changes as markets interpret the legal and policy landscape surrounding tariffs.

"Friday's sell-off was washed out by today's rally," said Jim Barnes, director of fixed income, at Bryn Mawr Trust in Berwyn, Pennsylvania.

"A lot of that has to do with investors trying to digest the tariff ruling (and) pinpoint exactly what it means for trade policy going forward so they can then get a better feel for how it's going to impact Treasuries."

The Trump administration has not provided tariffs collection data since December 14. But Penn-Wharton Budget Model economists estimated on Friday that the amount collected in Trump's tariffs based on the International Emergency Economic Powers Act stood at more than $175 billion.

Trump said on Saturday he would raise a temporary tariff from 10% to 15% on U.S. imports from all countries, the maximum level allowed under the law.

In afternoon trading on Monday U.S. 10-year yields fell 5.6 basis points (bps) to 4.029% US10YT=RR, after earlier hitting their lowest since late November.

U.S. 30-year yields also slid, down 2.8 bps at 4.697% US30YT=RR.

On the front end of the curve, the two-year yield, which reflects interest rate expectations, was down 4 bps at 3.440% US2YT=RR, sinking from a nearly two-week low earlier in the session.

U.S. Treasuries also caught a bid in the midst of U.S.-Iran tensions, analysts said.

The U.S. has built up one of its biggest military deployments in the Middle East, with Trump warning on Thursday that "really bad things will happen" if no deal is reached to solve a longstanding dispute over Tehran's nuclear program. Iran has threatened to strike U.S. bases in the region if it is attacked.

In other parts of the bond market, the yield curve flattened on Monday in the wake of the Supreme Court ruling and Trump's tariff plan to impose 15% tariffs on all global imports into the United States.

The spread between two-year and 10-year yields narrowed to 53.60 bps US2US10=TWEB, the smallest gap since December 10. It was last at 58.7 bps, compared with 60.3 bps late on Friday, flattening for nine straight sessions.

The curve showed a bull-flattening move, with long-term rates falling faster than short-term yields, a pattern that typically signals flight-to-quality trades.

U.S. rate futures on Monday priced in nearly 60 bps of easing this year or roughly two rate cuts of 25 bps each. That was higher from roughly 55 bps last Friday.

Treasury yields, meanwhile, modestly extended their decline after data showed U.S. factory orders fell 0.7% in December, a deeper contraction than the 0.6% slide that Wall Street economists expected. A sharp decline in commercial aircraft bookings weighed on the headline number.

Orders, however, advanced 3.7% on a year-on-year basis in December. The report was delayed by last year's government shutdown, which dragged gross domestic product growth lower in the fourth quarter.