TREASURIES-Word of narrower Trump tariffs sends US yields higher

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10-year climbs as investors take some comfort

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S&P data also boost yields

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Analysts say markets still contending with uncertainty

(Recasts, updates yields; adds new commentary, Bostic comments in paragraphs: 1-3, 6-9, 13, 14-16)

By Douglas Gillison and Davide Barbuscia

March 24 (Reuters) -

U.S. Treasury yields continued to drift upwards on Monday, with the benchmark 10-year touching its highest level in six days as investors reacted to reports that President Donald Trump could soften the hit from a tranche of tariffs expected next week, adding to gains seen on Friday.

Trump said on Monday he might give a "lot of countries" breaks on tariffs and that he plans to announce more tariffs on automobiles in the next few days. This followed earlier media reports that the tariffs' hit could be softer than feared.

The comments sent stocks sharply higher and flushed investors from safer bonds, pushing prices down and yields up in a classic risk-on scenario.

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 are mostly expected to drive inflation higher and hurt economic growth, so the prospect of more targeted import duties offered some relief.

Will Compernolle, a macro strategist for FHN Financial, said that while Monday's trading session had shown some signs of investor relief, it was still within the narrow band seen most of this month because markets still lacked clarity on the direction of policy and the economy.

"As far as I can tell, this month Treasuries are responding to different rate reports and the omnipresent tariff headlines but there hasn't been a fundamental rethink of the outlook for the economy and rates," he said.

While economic surveys have been deteriorating, the picture from so-called hard data remains "cloudy," he said.

Investors are likewise still contending with fiscal and labor market uncertainty. Congress is considering extending 2017's sweeping tax cuts and the full effect of deep cuts to the federal workforce from Elon Musk's Department of Government Efficiency may have yet to show up in the jobs data.

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 late trade, the benchmark 10-year yield was up 8.5 basis points from late Friday at 4.337% while the two-year yield rose 9.1 basis points to 4.039%.

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.

Fed policymakers last week left rates unchanged and signaled two rate cuts remain likely later this year, as the central bank had previously indicated.

But in a television appearance, Raphael Bostic, president of the Atlanta Federal Reserve Bank, told Bloomberg he had lowered his expectations from two cuts to one due the "bumpy" path he foresaw for inflation.

Amid a batch of economic indicators due later this week, the most important is Friday's Fed's preferred inflation indicator, the personal consumption expenditures price index, which consensus forecasts see holding steady but well above the Fed's 2% target.

On the supply side, later this week investors will need to absorb some $183 billion in government debt sales divided between two-year, five-year, and seven-year notes.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 29.6 basis points, unchanged from Friday.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.590%, versus 2.558% late Friday.

The 10-year TIPS breakeven rate was last at 2.354%, indicating the market sees inflation averaging about 2.4% a year for the next decade. (Reporting by Douglas Gillison and Davide Barbuscia; Editing by Andrea Ricci and Deepa Babington)