TREASURIES-Treasury yields dip, market tends bruises before retail sales and Powell

(Updates for U.S. afternoon)

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Market stabilizes after last week's bond yield surge

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Powell's speech and retail sales data on Wednesday

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Bond market recovery eases financial turmoil fears

By Alden Bentley

NEW YORK, April 15 (Reuters) - Yields on U.S. Treasury debt fell a bit on Tuesday as traders marked time before midweek data on consumer activity and a speech from the head of the Federal Reserve, with little new tariff news to rekindle last week's bond rout. "Its a very tenuous and uneasy quiet," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York. The benchmark 10-year Treasury note traded in a small range on the back of a stronger-than-expected April New York State manufacturing index, and a surprising decline in March import prices. Yields mostly moved inversely to the stock market, where U.S. indexes opened higher in a sign that the panic that gripped markets last week was subsiding, then dipped into the red. Tuesday's economic releases, while secondary, ran a bit counter to the worrisome "stagflation" narrative that has been difficult for investors and Fed policymakers to navigate in recent weeks. The 10-year yield was down 4.3 basis points (bp) from late Monday, at 4.321%. .

"The market is taking a little bit of an opportunity to take its breath," said Nate Thooft, chief investment officer of multi-asset solutions and senior portfolio manager at Manulife Investment Management in Boston. "We're still a little bit worried that there's been some damage done to the overall perception of U.S. assets including both the dollar and the Treasury (market.)" The S&P 500 opened up slightly, partly on the back of U.S. President Donald Trump's suggestion late on Monday that he might grant exemptions on auto-related levies already in place, then eased a bit.

While Trump's remarks were consistent with his erratic policy pronouncements, investors were content to take it easier before the Good Friday market holiday and a long weekend. But there was no complacency after the financial markets' freak-out on the back of Trump's April 2 announcement of bigger-than-expected tariffs on trading partners, and sudden about-face offer of a 90-day pause for most countries.

"Arguably a bigger relief for investors was the recovery in the bond market, which eased fears about some sort of serious financial turmoil developing," Deutsche Bank wrote in Tuesday's Macro Strategy note. "Investors had already been alarmed, and last week's +49.5 bp jump in the 10-year Treasury yield was the biggest weekly jump since 2001, with the yield moving higher every day last week. However, that began to reverse yesterday (Monday)."

Hedge funds and other asset managers offloaded bonds last week, sending yields sharply higher, after receiving margin calls and posting sharp losses from market volatility, analysts said. The shakeout brought dislocations across fixed-income and derivatives markets, although widespread talk of a major unwind of basis trades arbitraging the gap between cash Treasuries and bond futures prices was not borne out by Commodity Futures Trading Commission hedge fund position data on Friday.

"We did not see a full unwind of that risk. And so if anxiety rises again and we get significant news on the tariff front that increases that anxiety, increases market volatility again, we are likely to see a greater significance of that unwind," Thooft said. Wednesday holds the possibility for more action, with retail sales data in the morning followed by an afternoon speech on the economic outlook by Fed Chair Jerome Powell. The two-year yield, which typically moves in step with interest rate expectations, eased 0.6 bp to 3.826%. The yield on the 30-year bond fell 2.7 bp to 4.771%. 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, flattened to +49.3 bp.

Trump's tariff war will be a challenge for the Fed if a recession comes and inflation moves away from its 2% target. The term structure in fed funds futures shows traders are betting on at least a 25 basis point cut by the Federal Open Market Committee at each of its June and July meetings, with another in October and a close call in December. The rate has been at 4.25% to 4.50% since December. According to bond strategists polled by Reuters who say an economic slowdown in the wake of Trump's erratic and sweeping tariffs on trading partners will eventually compel the Federal Reserve to lower interest rates, which means the 10-year yield would decline to a median 4.21% by the end of June and 4.14% in a year.

The inflation breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.358% after closing at 2.398% on Monday.

The 10-year TIPS breakeven rate was last at 2.194%, indicating the market sees inflation averaging about 2.2% a year for the next decade. (Reporting by Alden Bentley; Editing by Andrea Ricci and Will Dunham)