Long-term yields soar after auto tariffs, curve steepens

NEW YORK – US Treasury long-term yields rose to their highest levels in over a month on Thursday as investors weighed the inflationary impact of President Donald Trump’s latest tariff moves alongside fresh data showing continued economic resilience.

Trump unveiled late on Wednesday his plan to implement 25% tariffs on imported cars and light trucks effective next week, while the duties on auto parts are expected to begin from May 3. Investors are also bracing for a wave of reciprocal tariffs he plans to unveil next week, though the US president has hinted there may be room for flexibility in the final policy.

Meanwhile, in a sign the labor market is holding up, the number of Americans filing new applications for unemployment benefits slipped last week, while the jobless rate appeared to have held steady in March, Labor Department data showed on Thursday.

That data followed other strong readings earlier this week, including the services sector in S&P’s PMI index for March and the durable goods orders report for February, which were both stronger than anticipated.

“Yields are starting to feel a bit of a trend here as US economic data is coming in better than expectations,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. “Maybe there is a bit of an inflation input priced in, but growth isn’t as bad as we thought.”

Treasury yields, which move inversely to prices, declined marginally after the release of fourth-quarter gross domestic product growth data.

While the headline figure was revised to 2.4%, higher than the consensus estimate of 2.3% in a Reuters poll, the data also showed consumer spending growth in the last three months of 2024 was revised lower by two-tenths of a percentage point to 4%. An analyst at BMO Capital Markets said in a note that the specifics within the fourth-quarter economic growth data were likely to tilt first-quarter GDP estimates lower.

But for the time being, the overall economic picture remained encouraging, said Ryan O’Malley, head of portfolio management at Ducenta Squared Asset Management.

“The economy is still growing at a fairly steady pace, inflation is still above target but growth remains positive,” he said.

Benchmark 10-year yields were last at about 4.371%, over three basis points higher than on Wednesday. They earlier hit an intra-day high of 4.4% – the highest level since February 24. Two-year yields, which more closely reflect market expectations for changes in monetary policy, were last at 4%, roughly one basis point lower on the day.

That meant the closely watched yield curve that plots the premium of 10-year yields over two-year yields widened to about 37 basis points, the widest since mid-January. The so-called bear steepening of the curve, bad for long-term bond prices, indicates the market expects interest rates to remain high due to ongoing resilience in the economy.

Longer-dated 30-year yields touched a high of 4.755%, the highest level since February 20.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.65%, versus 2.61% on Wednesday. The 10-year TIPS breakeven rate was last at 2.39%, up from 2.38% on Wednesday, indicating the market sees inflation averaging about 2.39% a year for the next decade.

On the supply side, the Treasury sold USD 44 billion seven-year notes on Thursday with a high yield of 4.233%, slightly higher than the market at the time of bidding, which suggests investors demanded higher compensation to absorb the issuance.

A two-year note sale on Tuesday was well-received, while a five-year note issuance on Wednesday also met lukewarm demand.

(Reporting by Davide Barbuscia; Editing by Paul Simao and Deepa Babington)