*

China's tariffs escalate trade war, send US Treasury

yields

lower

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US jobs report exceeds expectations

*

Fed rate cut expectations rise on recession fears, tariffs

impact

(Updates to afternoon US trading)

By Chuck Mikolajczak

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

dropped on Friday after China countered against U.S. President

Donald Trump's outsized import tariffs plan, although the

declines eased somewhat 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 Trump that has fueled

global recession fears 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.

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.

"The volatility that we're seeing clearly is a function of

uncertainty, the uncertainty level remains extraordinarily high

right now with the wide range of outcomes." said Bill Merz, head

of capital markets research at U.S. Bank Asset Management in

Minneapolis.

"When we had the tariff announcements, there was

obviously a clear and significant negative reaction to that. And

since then, investors in general, and the market reaction has

really been piling on to the idea that there could be additional

negative announcements or, to the contrary, positive

announcements."

RECESSION FEARS

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

fell 8.3 basis points to 3.972% after falling to a

six-month low of 3.86% and was poised for its biggest weekly

drop in about eight months.

The yield on the 30-year bond tumbled 10.1

basis points to 4.383% after falling to a four-month low of

4.331%.

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 31.8%, according

to CME Group's

FedWatch Tool

, up from 21.9% in the prior session.

Markets are currently pricing in 91 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,

declined 8.3 basis points to 3.605% after hitting 3.465%, its

lowest level since early September 2022 and was on pace for its

biggest weekly drop in about seven months.

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 32.6 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

2.383% and was poised for its lowest close of the year.

The 10-year TIPS breakeven rate was last

at 2.168%, indicating the market sees inflation averaging about

2.2% a year for the next decade.