TREASURIES-Yields rebound from earlier lows, but mixed on the day

By Karen Brettell

NEW YORK, April 7 (Reuters) - U.S. Treasury yields rebounded from earlier lows on Monday when two-year yields hit their lowest levels since September 2022, but were mixed on the day with only longer-dated debt yields trading above Friday's close.

The debt is expected to remain volatile as traders struggle with how to price bonds due to continuing uncertainty over the impact of an escalating trade war.

Treasury yields have plunged along with stocks on concerns that the U.S. and the global economy will face a downturn as U.S. President Donald Trump places higher-than-expected tariffs on trading partners.

U.S. government bonds have also acted as a safe haven from the stock market turmoil.

“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, blasting China for hitting back with retaliatory tariffs and repeating a call for the U.S. Federal Reserve to cut interest rates.

Some optimism that countries will reach deals to avoid tariffs may have helped to reverse the earlier yield drop on Monday.

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

The European Union is still willing to negotiate with the U.S. administration, European Commission President Ursula von der Leyen reaffirmed on Monday, adding that Brussels was also ready to take counter measures.

Investors including hedge funds may also be selling liquid assets such as U.S. government bonds to meet margin calls due to losses they are facing in other assets.

Benchmark 10-year note yields US10YT=RR were last up 5.2 basis points on the day at 4.043%. They fell to 3.86% on Friday, the lowest since October 4.

Interest rate sensitive two-year yields US2YT=RR were down 3.7 basis points at 3.633%. They earlier reached 3.435%, the lowest since September 2022.

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

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 now pricing in 105 basis points of cuts by year-end, with the first most likely in June.

“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 that the U.S. central bank 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.

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

Demand for Treasury debt will also be tested this week as the Treasury sells $119 billion in coupon-bearing debt. 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.