(Updates with comments from Fed Chair Powell)

*

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.