TREASURIES-US bond market rallies on Trump Treasury pick Bessent

By Davide Barbuscia

NEW YORK, Nov 25 (Reuters) - U.S. Treasury yields declined sharply on Monday as investors speculated on a more moderate than feared U.S. fiscal trajectory after hedge fund manager Scott Bessent was nominated as U.S. Treasury secretary by President-elect Donald Trump on Friday.

Benchmark 10-year Treasury yields were down by some 10 basis points while two-year yields declined by about 5 points, leading the closely watched curve that compares yields on those two maturities to invert.

Expectations of a widening budget deficit due to tax cuts under Trump's Republican government have pushed Treasury yields higher over the past few weeks. The choice of Bessent, however, was largely seen by investors as potentially moderating the negative impact of Trump's policies on U.S. fiscal health as well as putting a lid on expected increases in tariffs.

"He's a Wall Street guy, he's very good at what he does, he's not an extremist to the left or right, he's a sensible smart businessman, and I think the market likes that, and he's anti-deficit," said Tony Farren, managing director at Mischler Financial Group.

In early trade on Monday, 10-year yields stood at around 4.3%, down from 4.41% on Friday. Two-year yields , which more closely reflect monetary policy expectations, were seen at around 4.31%, down from 4.369% on Friday.

"A lot of people bought into this idea that Trump was bad for rates and they were short, and I think they're getting punished," said Farren.

The part of the Treasury yield curve that plots two-year and 10-year yields was inverted at minus 1.3 basis points, with short-term bonds yielding more than longer ones.

"With Trump being president, the Fed is going to be less aggressive, and that's clearly been played out, so I'm not shocked at all that the curve has flattened over the last few weeks," added Farren.

On Monday, traders in interest rates futures were assigning a 52.5% probability to a 25 basis point interest rate cut by the U.S. central bank in December, down from a 59% probability on Monday last week, CME Group data showed.

The logic behind Monday's bond rally was "relatively straightforward" as it was based on a view that Bessent will "keep a leash on deficits and take a thoughtful approach to tariffs," strategists at BMO Capital Markets said in a note.

Bessent told the Wall Street Journal in an interview published on Sunday he will prioritize delivering on election tax cut pledges, while also focusing on cutting spending and maintaining the status of the dollar as the world's reserve currency.

"Bessent won't prevent tariffs from being utilized or borrowing needs from increasing," the BMO strategists wrote. "It's simply the perception that both will be approached in a more methodical manner with an adherence to traditional economic policy."

Outside of expectations on U.S. policies, the economic calendar was light at the beginning of the holiday-shortened week, with the biggest event a $69 billion auction of two-year Treasury notes later on Monday. (Reporting by Davide Barbuscia; editing by Jonathan Oatis)