US 10-year yield hits highest since late August
US 30-year yields rise to highest since early September
US 2/10 yield curve hits widest on two weeks
US rate futures price in less than two cuts in 2026
Adds new comments, updates prices
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 20 (Reuters) - U.S. Treasuries fell on Tuesday, with the selloff more pronounced on the long end of the curve, as investors reacted to turbulence in Japanese government bonds and President Donald Trump's renewed threat of a trade clash with Europe over its proposed acquisition of Greenland.
With U.S. markets closed on Monday for a holiday, Tuesday marked investors' first opportunity to respond to weekend developments, including Trump's warning that he would impose an additional 10% tariff starting Feb 1 on imports from several European countries unless the United States is allowed to buy Greenland.
A wave of selling on Tuesday sent long‑end Treasury yields to their highest levels in several months, underscoring the inverse relationship between yields and bond prices.
But analysts said tariffs were not the only thing in the mix. Japanese government bonds on Tuesday also saw significant selling, with spillovers into U.S. and European markets, after Prime Minister Sanae Takaichi's calling of a snap election shook confidence in the country's fiscal health.
A weak auction of Japan's 20-year bonds further exacerbated selling of JGBs.
"Unquestionably, Japan's selloff weighed on Treasuries," said Stan Shipley, fixed income strategist, at Evercore ISI in New York. "Still, Japanese yields are still on the low side here and it probably needs to go higher to support their currency, which has been quite weak for a long time."
The benchmark U.S. 10-year yield US10YT=RR hit its highest since late August of 4.313%, and by afternoon trading, was last up 5.6 basis points (bps) at 4.287%.
The yield pierced through a key technical level of 4.20%, which could pave the way for upside resistance near 4.50%, wrote Adam Turnquist, chief technical strategist at LPL Financial in Charlotte, North Carolina, in a research note.
U.S. 30-year yields rose 7.8 bps to 4.918%, after earlier hitting its strongest level since early September of 4.948% US30YT=RR. It also posted its largest daily increase since mid-July last year.
On the front end of the curve, the U.S. 2-year yield slipped 1 bp to 3.591% US2YT=RR.
As a result, the yield curve steepened on Tuesday, with the spread between two-year and 10-year yields widening to as much as 70.9 bps US2US10=TWEB, the largest gap in roughly two weeks. The curve was last at 68.8 bps, compared with 63.3 bps last Friday.
The curve showed a bear-steepening scenario, with long-term yields rising faster than short-term rates, reflecting market concerns about a pickup in inflation.
NO TO TARIFFS
Major European Union states have since decried the tariff threats from Trump as blackmail and the bloc is looking at retaliating with its own measures.
The latest escalation of trade tensions also sparked broad selling of the dollar =USD and Wall Street shares in a move reminiscent of last year's crisis of confidence in U.S. assets following Trump's "Liberation Day" announcement.
Kenneth Broux head of corporate research FX and rates at Societe Generale said it was "a perfect storm" of factors driving moves in Treasuries: the "carnage" in Japanese bonds, Trump's tariff threats, and simple momentum - 10-year yields closing above the "technically-important" level of 4.20% on Friday.
The Federal Reserve, meanwhile, will meet next week to decide on monetary policy and market participants expect the central bank to hold interest rates steady at the 3.5%-3.75% target range.
U.S. rate futures priced in on Tuesday just 47 bps of easing this year, or less then two rate cuts of 25 bps each. That was 53 bps in late December.
"The main driver for Treasuries this year would be economic growth and then monetary policy," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.
"It starts with the economy, where the data comes out and you know it's supportive of an economy that's growing 2% and a labor market that's healthy. That's going to lead to rate cuts being taken off the table for 2026."
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Tom Westbrook, Rae Wee in Singapore and Alun John in London; Editing by Thomas Derpinghaus, Susan Fenton and Nick Zieminski)
((gertrude.chavez@thomsonreuters.co;646-301-4124))
