TREASURIES-Yields rebound on optimism over tariff deals

Updates to New York afternoon

By Karen Brettell

NEW YORK, April 7 (Reuters) - U.S. Treasury yields rebounded on Monday and 10-year yields were on track for their largest daily gain in a year 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 wondered how long trade levies will last and how much they will dent economic growth.

White House economic adviser Kevin Hassett said Trump has talked to world leaders all weekend and will listen to proposals for great deals.

"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 rallied sharply earlier on a report that Trump may pause tariffs for all countries except China for 90 days, though this was denied by the White House.

Treasuries lost some safe-haven demand as stock markets turned around, with the Nasdaq Composite .IXIC briefly turning positive on the day.

Investors including hedge funds may be selling liquid assets such as U.S. government bonds to meet margin calls due to their losses in other assets. Traders are also watching for any signs that large sovereign holders including China may be reducing their U.S. debt holdings.

Benchmark 10-year note yields US10YT=RR were last up 15.8 basis points on the day at 4.149% and are on track for the largest daily increase since April 10, 2024. They fell to 3.86% on Friday, the lowest since October 4.

Interest-rate sensitive two-year yields US2YT=RR rose 6.2 basis points to 3.732% and are heading for their largest daily increase since March 24. They earlier reached 3.435%, the lowest since September 2022.

The yield curve between two- and 10-year notes US2US10=TWEB was last at 41 basis points, after reaching 45 basis points, the steepest since January 13.

Treasury yields plunged late last week on concerns that the U.S. and the global economy will face a downturn from the bigger-than-expected trade levies.

"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 and threatened to increase duties on China.

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 pricing in 95 basis points of cuts by year-end, with the first most likely in June, down from the 122 basis points of cuts priced in just hours earlier.

"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 the Fed 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.

This week's U.S. economic focus will be the March consumer price and producer price reports, which are due on Thursday and Friday, respectively. Data on Friday showed employers added more jobs than expected last month, though the unemployment rate also ticked higher.

U.S. debt demand will also be tested this week as the Treasury sells $119 billion in coupon-bearing securities. 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.

(Reporting by Karen Brettell; Additional reporting by Rae Wee and Harry Robertson; Editing by Sam Holmes, Alex Richardson, Sharon Singleton, Andrea Ricci and Richard Chang)

((karen.brettell@tr.com))