TREASURIES-US yields slip as markets cheer gradual approach to tariffs, for now

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US 10-year, two-year yields slip, but tariff threat lingers

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Markets price in 38 bps of Fed easing in 2025

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Trump says he may impose tariffs on Canada, Mexico next month

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US 2/10 curve flattens, hits narrowest gap since late December

(Adds analyst comment, graphics, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 21 (Reuters) - U.S. Treasury yields on most maturities fell on Tuesday after President Donald Trump refrained from imposing tariffs on his first day in office, although he said imports from Canada and Mexico may get some duties on Feb. 1.

U.S. yields, from two-year notes to 30-year bonds, earlier slid to their lowest since early January, before those on the short end recovered. The fall in yields continued a downtrend that started last week with tepid consumer prices data for December.

In his inauguration speech on Monday, Trump declared immigration and energy emergencies, but only briefly mentioned tariffs and issued a memo that directed agencies to investigate and remedy persistent trade deficits.

But Trump said later on Monday he was thinking about imposing 25% tariffs on imports from Canada and Mexico as soon as Feb. 1, without offering details. The president also said he wanted to reverse the U.S. trade deficit with the European Union, either with tariffs or more energy exports.

"This is typical of what we're going to see: there's a lot of rhetoric and talk about policies or upcoming policies, or policy intentions. But the reality is all about the actual implementation," said Thomas Urano, co-chief investment officer, at Sage Advisory in Austin.

"There was speculation over the weekend that Trump will not actually go with Day One tariffs and of course we didn't see that. So the market has been good (yields lower) and the CPI number (last week) has been very helpful."

Market ructions in the wake of Trump's comments were mainly felt in currencies.

In afternoon trading, the yield on the benchmark U.S. 10-year Treasury note sagged 3.7 basis points (bps) to 4.574%, after touching a more than two-week low of 4.53%. The yield on the 30-year bond fell 4.2 bps to 4.803%782%, also hitting a two-week trough of 4.776%.

On the short end of the curve, the two-year U.S. Treasury yield, which typically moves in step with interest-rate expectations, was up 1.1 bps at 4.281%. Earlier, the yield touched its lowest since Jan. 2 at 4.219%.

The U.S. Treasury yield curve on Tuesday, meanwhile, reduced its steepness and showed what traders call a "bull flattening," where long-term interest rates are falling faster than shorter-dated ones. The gap between two-year and 10-year Treasury yields narrowed to 27.8 bps, the flattest since late December, down from 33.8 bps late on Friday.

The curve reflects lower inflation expectations, analysts said, with the market viewing a gradual approach on tariffs as reducing price pressures. A bull flattener typically precedes the Fed lowering short-term interest rates.

"I don't know if Treasury yields go crashing lower from here without a pretty sharp slowdown in the economy," said Sage's Urano. "I think 10-year yields are fairly valued in the mid-4% range."

Concerns over price pressures also eased modestly amid weakening oil prices after Trump announced drilling plans to boost U.S. crude oil and gas production. That also weighed on Treasury yields, analysts said.

Brent crude futures were last down 0.9%, at $79.46 per barrel, while U.S. West Texas Intermediate crude futures dropped 2.3% to $75.89.

The Federal Reserve last month shocked the market by projecting just two rate cuts in 2025, down from four predicted previously, due to worries over inflation and uncertainties surrounding the Trump administration's election pledges.

Analysts have said that Trump's policies on immigration, tax and tariffs will likely boost growth but also be inflationary.

The Fed is expected to hold rates steady this month but keep a wary eye on inflation. Markets price in about 38 basis points of easing this year, that will likely resume again at the June meeting, according to LSEG calculations.