TREASURIES-US yields drop on China tariff response; job report eases concern

(Updates with comments from Fed Chair Powell)

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China's tariffs escalate trade war, send US Treasury yields lower

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US jobs report exceeds expectations

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Fed rate cut expectations rise on recession fears, tariffs impact

By Chuck Mikolajczak

NEW YORK, April 4 (Reuters) - U.S. Treasury yields dropped on Friday after China retaliated against U.S. President Donald Trump's outsized import tariffs plan, although the declines were eased after a solid U.S. jobs report.

Yields tumbled as

China announced

additional tariffs of 34% on U.S. goods on Friday, the most serious escalation in a trade war with President Donald Trump that has fueled fears of a global recession and led to the steepest stock market drop in several years, prompting a flight to safe-haven assets by investors.

But yields pared some declines after the Labor Department said nonfarm

payrolls increased

by 228,000 jobs last month, well above the forecast for a gain of 135,000, after a downwardly revised rise of 117,000 in February, while the unemployment rate ticked up to 4.2% from 4.1%.

"There's not a lot to dislike about the employment report," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"The Fed doesn't meet for another month, but when it does it can comfortably cut if tariffs are still in place at that time, but it won't likely feel a sense of urgency to."

Movement in yields was choppy during Fed Chair Jerome Powell's remarks to a journalists' conference in Arlington, Virginia, but remained sharply lower on the session.

Powell said

Trump's tariffs are "larger than expected" and the economic fallout including higher inflation and slower growth likely will be as well, but the central bank has time to wait to see how the data unfolds before determining the monetary policy response.

"This suggests that the Fed won't cut rates as much as the market had hoped. Reading between the lines, he's saying that if the economy slows he'll let it slow because he's more worried about inflation at this point," said Gene Goldman, chief investment officer at Cetera Investment Management in El Segundo, California.

RECESSION FEARS The yield on the benchmark U.S. 10-year Treasury note fell 12.6 basis points to 3.929% after falling to a six-month low of 3.86% and was poised for its biggest weekly drop in about nine months. The yield on the 30-year bond slumped 13 basis points to 4.354% after falling to a four-month low of 3.331%.

Recession fears have increased

market expectations

the Fed will be more aggressive in cutting interest rates this year. Expectations for a cut of at least 25 basis points at the central bank's May 6-7 meeting now stand at 33.6%, according to CME Group's

FedWatch Tool

, up from 21.9% in the prior session and 18.5% a week ago.

Markets are currently pricing in 100 basis points of cuts for 2025, according to LSEG data.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, tumbled 12 basis points to 3.605% after hitting 3.465%, its lowest level since early September 2022 and was also on track for its biggest weekly drop in about nine months.

Investors fled to the safety of bonds globally after Trump revealed on Wednesday his long-anticipated tariffs plan, which included a 10% minimum tariff on most goods imported into the country, with much higher duties on dozens of countries.

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 32 basis points. In a post on his media platform on Friday directed at investors, who he said were investing massive amounts of money in the U.S., Trump said his policies would never change.

In the wake of the tariffs, multiple analysts have upped their forecasts for a recession, including Goldman Sachs and J.P. Morgan, as the latter upped the probability of a recession in the global economy to 60% from 40% by the end of this year. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.394% and was poised for its lowest close since December 31. The 10-year TIPS breakeven rate was last at 2.183%, indicating the market sees inflation averaging about 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; additional reporting by Sin?ad Carew in New York, Rae Wee in Singapore and Yadarisa Shabong in Bengaluru; Editing by Chizu Nomiyama and Paul Simao)