TREASURIES -US yields dip on tariff uncertainty; investors want policy clarity

Recasts, adds new comment, graphics, updates prices

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 4 (Reuters) - U.S. Treasury yields slipped on Tuesday in volatile trading, weighed down by persistent uncertainty surrounding the administration's trade policy after a slew of headlines on tariffs ended up with Canada and Mexico getting 30-day reprieves on those duties.

U.S. President Donald Trump on Monday suspended his threat of 25% tariffs on Mexico and Canada at the last minute, agreeing to a 30-day pause in return for concessions on border and crime enforcement.

China, on the other hand, imposed targeted tariffs on American imports on Tuesday and put several companies, including Google, on notice for possible sanctions, in what market participants described as a measured response to an additional 10% U.S. tariff on Chinese exports.

China's new tariffs will not take effect until Feb. 10, giving Washington and Beijing time to try to seek a deal that Chinese policymakers have indicated they hope to reach with Trump.

"There's going to be that push and pull throughout the next couple of quarters as the market gets used to the tariffs and threats: what's actionable and what's just bluster," said Lawrence Gillum, chief fixed income strategist, at LPL Financial in Fort Mill, South Carolina.

Treasury yields earlier fell after data showing U.S. job openings dropped sharply in December. The Bureau of Labor Statistics' Job Openings and Labor Turnover Survey, or JOLTS report showed that job openings, a measure of labor demand, slid to 7.6 million on the last day of December.

In afternoon trading, the benchmark 10-year yield was last down 2.8 basis points (bps) at 4.515% US10YT=RR, after dropping on Monday to its lowest since mid-December.

"I still think the 10-year yield could hit below 4% later this year, but that's really predicated on a slowing economy," said Gillum. "If data continues to hold up, there's no reason that we can't trade between 4.50% to 5%."

U.S. 30-year yields also slid to 4.751%, down 2 bps US30YT=RR.

On the short end of the curve, U.S. two-year yields, which are tied to the Federal Reserve's policy moves, fell 5.1 bps to 4.214% US2YT=RR.

Also helping push the two-year yield down was a report showing new orders for U.S.-manufactured goods dropped 0.9% in December after a revised 0.8% decline in November. Economists polled by Reuters had forecast factory orders would fall 0.7% after a previously reported 0.4% drop in November.

The yield curve, meanwhile, flattened modestly on Tuesday, with the gap between two-year and 10-year yields at 29.7 bps US2US10=TWEB, from 30.2 bps in the previous session. The curve hit its narrowest since late December on Monday after the initial tariff announcements.

Investors have been selling the long end of the curve, demanding higher compensation, or the so-called "term premium," in exchange for dealing with policy uncertainty over a longer time horizon. The current term premium for U.S. 10-year notes stood at 72 bps, according to estimates from the St. Louis Fed, compared with about 45 bps in early December.

"You expect yields to fall further, but that lack of clarity on policy is really giving intermediate and long-term investors more pause," said Chip Hughey, managing director of fixed income, at Truist Advisory Services in Richmond, Virginia.

U.S. rate futures, meanwhile, have priced in about 46 bps of easing this year, or nearly two rate cuts of 25 bps each. That was up from 41 bps late on Monday, according to LSEG calculations, with the first rate cut likely happening at the Fed's June or July policy meeting.