*

China's tariffs escalate trade war, sends US Treasury

yields

lower

*

US jobs report exceeds expectations

*

Fed rate cut expectations rise amid recession fears and

tariff

impacts

(Updates to US morning trade)

By Chuck Mikolajczak

NEW YORK, April 4 (Reuters) - U.S. Treasury yields

remained sharply lower on Friday after China retaliated against

U.S. President Donald Trump's outsized tariff plan that caught

markets off guard by its scope, although losses were curbed

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 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 135,000

forecast, after a downwardly revised 117,000 rise 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, Annex Wealth Management,

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."

The yield on the benchmark U.S. 10-year Treasury note

fell 12.2 basis points to 3.933% after falling to

a six-month low of 3.86%.

Jacobsen added that the payrolls report is backwards

looking and investors could potentially look past it due to the

tariff overhang, "It's like using a map and finding out that you

were on track to your destination, but what if you just blew

past the exit you were supposed to take? That's the feeling in

the markets right now."

The yield on the 30-year bond fell 10.9 basis

points to 4.375% after falling to a four-month low of 3.331%.

Recession fears have increased

market expectations

the Federal Reserve 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 meeting now stand at

32.9%, according to CME's

FedWatch Tool

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

Markets are currently pricing in about 99 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, fell

14.7 basis points to 3.578% after hitting 3.465%, its lowest

since early September 2022.

After several Fed officials earlier this week cited

uncertainty caused by the tariffs as a reason for holding

monetary policy steady, Federal Reserve Chair Jerome

Powell is scheduled

to weigh in with comments at 11:25 a.m EDT (1525 GMT).

Investors scurried 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 35.1 basis points.

Trump on Friday

told investors

who he said were investing money in the United States that

his policies would never change, in a post on his social media

platform.

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 year-end.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.430% after closing at 2.537%, its lowest close since March 17.

The 10-year TIPS breakeven rate was last at

2.193%, indicating the market sees inflation averaging about

2.2% a year for the next decade.