TREASURIES-US yields tumble to multi-week lows after service sector data, tariff risks

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US 10-year yield hits lowest since mid-December

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US two-year yield falls to lowest since Dec. 12

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US two/10-year yield curve flattens, narrowest gap since Dec. 23

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By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 5 (Reuters) - U.S. Treasury yields dropped to multi-week lows on Wednesday, weighed down by a weak report on the services sector, with investors continuing to grapple with persistent uncertainty about the Trump administration's tariff policy and the prospect of trade wars.

The benchmark 10-year yield dropped to its lowest since mid-December after the services data. It was last down 8.5 basis points (bps) at 4.428%. The two-year yield also fell, sliding to its weakest level since Dec. 12. It last changed hands at 4.170%, down 4.4 bps.

The drop came after data showed the U.S. services sector activity unexpectedly slowed in January.

The Institute for Supply Management's (ISM) non-manufacturing purchasing managers index (PMI) slipped to 52.8 last month from 54.0 in December. Economists polled by Reuters had forecast the services PMI edging up to 54.3.

But the market focus remains on tariffs and trade wars.

"The trade war is the recent thing driving yields. We've had the big threat of tariffs and that hasn't really materialized, at least for the moment," said Kathy Jones, chief fixed income strategist at Schwab in New York.

"And that was a relief to the market from the point of view of inflation or the price impact of tariffs ... But it's really a day-by-day, really a minute-by-minute assessment of the outlook. What is the outlook for the next six to 12 months?"

The uncertain outlook on tariffs came as the U.S. trade deficit widened sharply in December. Imports

surged to a record high

against the backdrop of tariff threats, which might have prompted businesses to rush purchases of foreign-made goods like metals and computers.

The trade gap increased 24.7% to $98.4 billion, the highest since March 2022, from a revised $78.9 billion in November, the Commerce Department's Bureau of Economic Analysis said. The rise was the largest since March 2015. Imports increased 3.5% to an all-time high of $364.9 billion.

The United States posted significant deficits with several trade partners, including China, Mexico and Canada, which have been targeted by President Donald Trump's administration for broad or additional tariffs. Trump on Monday suspended a 25% tariff on Mexican and Canadian goods until next month.

In other parts of the bond market, the yield curve flattened, with the gap between two-year and 10-year yields hitting 23.7 bps, from 29.5 bps in the previous session.

The curve hit its narrowest spread since Dec. 23, with traders describing it as a bull flattener, a scenario in which long-term rates are falling faster than short-dated one. The flattening of the curve reflects concerns about the growth and inflation outlook that could prompt the Federal Reserve to hold interest rates unchanged for longer. (Reporting by Gertrude Chavez-Dreyfuss Editing by Nick Zieminski)