TREASURIES-Yields rise on reports of narrower Trump tariffs

By Douglas Gillison and Davide Barbuscia

March 24 (Reuters) - U.S. Treasury yields started the week on the upswing on Monday as investors digested media reports that President Donald Trump could soften the hit from a tranche of tariffs expected next week, adding to gains seen on Friday.

Trump had anticipated applying reciprocal levies starting on April 2 but sector-specific tariffs are now not likely to be announced that day, according to media reports over the weekend citing administration officials. Trump on Friday also said there would be some flexibility regarding reciprocal tariffs, which pushed stocks and Treasury yields higher.

If implemented fully, the new round of tariffs is largely expected to drive inflation higher and hurt economic growth, so the prospect of more targeted import duties offered some relief.

"They will be less harsh, which will mean less of a shock to the economy, and that's the reason why the 10-year (yield) is rising," said Stan Shipley, fixed-income strategist at Evercore ISI in New York.

However investors are also still contending with fiscal and labor market uncertainty as Congress considers extending 2017's sweeping tax cuts, and the full effects on employment remain to be seen from Elon Musk's Department of Government Efficiency and its efforts to slash the federal workforce, according to Shipley.

Meanwhile, continued uncertainty over the administration's trade policies will likely keep investors on edge. Trump's on-again, off-again tariff announcements have been the main driver of market action over the past few weeks, sparking volatility in stocks and bonds.

"Investors are understandably wary of each incoming White House headline that could potentially reshape the tariffs debate," analysts at BMO Capital Markets wrote in a note. "One of the most relevant takeaways from the process has been that the only unifying theme is one of uncertainty," they said.

Results of a global markets survey conducted by Deutsche Bank between March 17 and March 20 showed that investor perception of tariff risk has increased, although 62% of the 400 respondents still think Trump's tariffs may be softer than his campaign pledges. Survey respondents put the risk of a U.S. recession over the next 12 months at 43% on average.

In mid-morning trade shortly before 1400 GMT, U.S. Treasury benchmark 10-year yields were up 5.8 basis points to 4.31% while the two-year yield rose 5.9 basis points to 4.007%.

Also boosting yields was an unexpectedly strong reading for the services sector in S&P's PMI index for March, which came in higher than the consensus at 54.3, showing clear expansion in the final month of the first quarter.

The same index for manufacturing, however, undershot expectations slightly and fell into contraction at 49.8.

Later on Monday, bond investors will keep a close eye on comments from Federal Reserve officials Raphael Bostic and Michael Barr to gather more clues on the direction of interest rates after Fed policymakers last week left rates unchanged and signaled two rate cuts remain likely later this year, as the central bank had previously indicated.

On the supply side, later this week investors will need to absorb some $183 billion in government debt sale divided between two-year, five-year, and seven-year notes. (Reporting by Douglas Gillison and Davide Barbuscia; Editing by Andrea Ricci)