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Treasury yields higher on day on tariff optimism

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Two-year yields earlier reach lowest since September 2022

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Tariff uncertainty expected to keep market volatile

(Updated in late New York morning time)

By Karen Brettell

NEW YORK, April 7 (Reuters) - U.S. Treasury yields

rebounded on Monday on rising optimism that some countries may

negotiate deals with U.S. President Donald Trump to avoid trade

tariffs.

Trading was choppy, however, as traders continued to try to

gauge how long trade levies will last and to what degree they

will dent economic growth.

White House economic adviser Kevin Hassett said the

president has talked to world leaders all weekend and will

listen to proposals for great deals.

The European Union is still willing to negotiate with the

U.S. administration, European Commission President Ursula von

der Leyen reaffirmed on Monday, adding that Brussels was also

ready to take counter measures.

"Yields are higher today off of the prospects that there may

be some tariff relief," said Angelo Manolatos, a macro

strategist at Wells Fargo. "But when we think about the bigger

picture, we expect a large hit to growth this year and much

lower Treasury yields."

Yields also rallied sharply but briefly on a report that

Trump may pause tariffs for all countries except China for 90

days, though this was denied by the White House.

Investors including hedge funds may also be selling liquid

assets such as U.S. government bonds to meet margin calls due to

losses they are facing in other assets.

Benchmark 10-year note yields were last up

12.8 basis points on the day at 4.119%. They fell to 3.86% on

Friday, the lowest since October 4.

Interest-rate sensitive two-year yields

rose 2.9 basis points to 3.699%. They earlier reached 3.435%,

the lowest since September 2022.

The yield curve between two-year and 10-year notes

was last at 42 basis points, after reaching 45

basis points, the steepest since January 13.

Treasury yields have plunged along with stocks on concerns

that the U.S. and the global economy will face a downturn as

U.S. President Donald Trump places higher-than-expected tariffs

on trading partners.

U.S. government bonds have also acted as a safe haven from

the stock market turmoil.

"For the foreseeable future bond investors are going to try

to find their footing and they're not really sure where they

even think fair value is based in the post-tariff world," said

Will Compernolle, macro strategist at FHN Financial.

Trump said on Sunday foreign governments would have to pay

"a lot of money" to lift sweeping tariffs that he characterized

as "medicine."

He also showed no sign of relaxing his tariff policy on

Monday, blasting China for hitting back with retaliatory tariffs

and repeating a call for the U.S. Federal Reserve to cut

interest rates.

Fed funds futures traders have increased bets on how many

times the Fed will cut interest rates this year, though Fed

Chair Jerome Powell has not indicated that the U.S. central bank

is in any rush to resume cuts. Traders are now pricing in 96

basis points of cuts by year-end, with the first most likely in

June.

"You do have to think that if the stock market collapses

enough, Powell will see that as a tightening in financial

conditions and maybe feel the need to bring easing a little bit

forward," Compernolle said.

As for Trump, "I think the President might be looking at

this like a game of chicken and he doesn't want to be the first

one to blink, so I don't think that there is a White House put

of any kind."

Powell said on Friday that the U.S. central bank is waiting

to see the impact of tariffs, noting that they are "larger than

expected," and the economic fallout including higher inflation

and slower growth likely will be as well.

The U.S. economic focus this week will be the March consumer

price and producer price reports, which are due on Thursday and

Friday, respectively. Data on Friday showed that employers added

more jobs than expected last month, though the unemployment rate

also ticked higher.

Demand for Treasury debt will also be tested this week as

the Treasury sells $119 billion in coupon-bearing debt. This

will include $58 billion in three-year notes on Tuesday, $39

billion in 10-year notes on Wednesday and $22 billion in 30-year

bonds on Thursday.