TREASURIES-Yields dip, remain in range as investors weigh tariff impact

By Karen Brettell

NEW YORK, March 21 (Reuters) - The U.S. benchmark 10-year Treasury yield dipped on Friday but held in the tight range it has traded in this month as investors balanced uncertainty over the impact of tariffs with the likelihood that the Federal Reserve will keep rates unchanged for the time being.

Investors are worried that tariffs will increase inflation in the near term while also weighing on economic growth. Federal government layoffs are also expected to lead to higher unemployment.

So far, however, the impact of the new policies has not been captured in the economic data. That is leaving market participants and the Federal Reserve to largely adopt a wait-and-see approach to where interest rates should be.

Fed Chair Jerome Powell on Wednesday described the uncertainty faced by Fed policymakers as "unusually elevated."

There is lack of conviction in the market, said Molly Brooks, U.S. rates strategist at TD Securities. The bond market has been boosted, however, by the Fed's plans to taper quantitative tightening, which will reduce the Treasury Department’s debt issuance needs, she said.

The U.S. central bank said on Wednesday that it will reduce the pace of the drawdown of its still-massive balance sheet, as it faces challenges in assessing market liquidity during an ongoing impasse over lifting the government’s borrowing limit.

New York Fed President John Williams said on Friday the U.S. central bank's monetary policy is in the right place at this time, given how the economy is performing in an environment where the outlook is quite uncertain.

Chicago Fed president Austan Goolsbee said on Friday that it remains an open question whether the Trump administration's tariff plans will lead to persistent inflation, with taxes on intermediate goods, retaliation by other nations, and other factors feeding into whether the central bank will have to react.

The yield on benchmark U.S. 10-year notes US10YT=RR was last down 2.1 basis points on the day at 4.212%. It has held in a range between 4.106% and 4.353% since February 25.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, fell 4.1 basis points to 3.916%.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened by around 2 basis points to 29.5 basis points.

Germany's Bundesrat upper house of parliament on Friday approved plans for a spending splurge that aims to revive growth in Europe's largest economy and scale up the military, clearing the final hurdle for the historic policy shift.

The plan sent German government debt yields sharply higher when it was announced earlier this month and is acting as an upward pressure on government debt yields globally.

Traders are also watching to see if Russia and Ukraine will agree to a deal to end their war.

President Donald Trump said on Thursday the United States will sign a minerals and natural resources deal with Ukraine shortly and that his efforts to achieve a peace deal for the country were going "pretty well" after his talks this week with the Russian and Ukrainian leaders.

The Treasury will sell $183 billion in short- and intermediate-dated debt next week, including $69 billion in two-year notes on Tuesday, $70 billion in five-year notes on Wednesday and $44 billion in seven-year notes on Thursday.