TREASURIES-US yields slide after Trump backs off on tariff threats on Europe

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Trump says withdraws tariff threat on European goods

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Trump says framework on Greenland deal reached

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Japanese bonds rally, underpin Treasuries

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US 20-year auction shows solid demand

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US 2/10 yield curve flattens

(Adds new comment, results of US 20-year bond auction, yield curve, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 21 (Reuters) -

U.S. Treasury yields eased on Wednesday, backing off from multi-month highs as risk sentiment improved after President Trump dropped his tariff threat on Europe, citing a framework for Greenland's acquisition.

Trump ?wrote on Truth Social that the Greenland

framework

was reached after a meeting with NATO Secretary General Mark Rutte in Davos, Switzerland. As a result, the tariffs that were supposed to go ?into effect on Feb 1st will not be imposed, he said.

Earlier in the session, Treasuries had rallied after Trump

ruled out using force

to ?acquire the Danish territory, calming investor nerves, and also following a solid 20-year auction that highlighted steady ?demand for U.S. government debt.

A ?recovery in Japanese government bonds earlier on Wednesday during the Asian session helped stabilize global fixed-income markets.

Investors had sold U.S. government debt on Tuesday in the wake of turmoil ?in Japanese bonds and Trump's threat to impose tariffs on European goods ?if the U.S. is not allowed to acquire Greenland.

"The signal from Donald Trump coming out of Davos is coordination, not confrontation, and that matters. Pulling back near-term tariffs while opening a framework with NATO around Greenland tells investors ?this is shifting from headline risk to negotiation risk," said Matthew ?Smart, director of ?financial planning and portfolio analysis, at WWM Investments in Chicago.

"Historically, markets are very comfortable with negotiation risk. From an investment perspective, this fits the broader pattern we've seen time and again, aggressive positioning to gain leverage, followed by deal architecture ?that lowers the probability of policy shock."

In afternoon trading, the benchmark U.S. 10-year yield fell 4 basis points (bps) to 4.255%, after hitting on Tuesday its highest level since late August following a steep selloff. Yields move inversely to prices.

The U.S. 30-year yield was down 4.9 bps at 4.872% . On Tuesday, it rose to its highest level since early September.

U.S. 20-year yield also sank, sliding 4.8 bps to 4.829% , extending their decline after a well-subscribed auction of 20-year bonds.

Priced at 4.846%

, the yield came in below the expected rate at ?the bid deadline, ?reflecting investor demand robust enough to accept a figure lower than what the market had anticipated.

The bid-to-cover ratio, another gauge of investor appetite, was

2.86

, higher than the December sale, and the average for the last three auctions.

On the front ?end of the curve, the U.S. 2-year yield was slightly down at 3.595%.

YIELD CURVE FLATTENS

The yield curve flattened on Wednesday following the Greenland headlines, with the spread between two-year and 10-year yields narrowing to 64.8 bps, from 69.4 bps the previous session. It had steepened to as much as 70.9 bps on Tuesday, the largest gap in roughly two weeks.

The yield curve steepening reflected market concerns about a pickup in inflation with Trump's tariff threats.

U.S. Treasuries also recovered amid the rebound in Japanese government bonds, although Japan's overall impact was limited.

The 30-year Japanese government bond yield tumbled, down from an unprecedented ?3.88% in the previous session. The benchmark 10-year yield fell after reaching a 27-year high on Tuesday.

"The magnitude of the pass-through is consistent with our take on the limited medium-term influence of JGB yields on U.S. rates," BMO Capital wrote in a research note.

"That said, we're cognizant that the bearish repricing underway in Japan will provide ?a touchstone for those investors anticipating higher U.S. rates." (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Laura Matthews; Editing by Paul Simao and Nick Zieminski)