TREASURIES-Yields dip on tentative hopes of trade war thaw

By Davide Barbuscia

NEW YORK, April 25 (Reuters) - U.S. Treasury yields declined on Friday on hopes of an easing in the U.S.-China trade war and as investors weighed the possibility that the Federal Reserve could pivot toward lower interest rates.

Friday's move in yields - which decline when bond prices rise - consolidated a trend this week of tentative optimism that the market may be stabilizing after weeks of sharp price fluctuations caused by U.S. President Donald Trump's on-again, off-again stance on tariffs.

Remarks from the White House this week pointed to a potentially softer U.S. stance on tariffs, particularly concerning China. Trump said his administration was talking with China to strike a tariff deal and that Chinese President Xi Jinping had called him. Beijing, however, disputed that negotiations were taking place.

"I am going to give them the benefit of the doubt that they're making progress on tariffs," said Tony Farren, managing director at Mischler Financial Group. "I think they're trying to regain their footing ... but if by next Friday there is no trade deal with any country, the markets are going to be upset."

Separately, remarks from Fed officials on Thursday raised the possibility the U.S. central bank may be open to lowering interest rates if the inflationary impact from tariffs is temporary and if the economy weakened quickly, which injected some cautious optimism in the Treasury market.

Those remarks came about one week after a speech by Fed Chair Jerome Powell that left investors worried that the central bank would be reluctant to cut rates.

"I think that's a very good sign that the Fed is paying attention and they're going to do what's right for the economy and not what's bad for Trump," said Farren.

Market fears lingered that Trump's erratic policymaking may push foreign investors to ditch Treasuries, a key concern in recent weeks, but analysts said there was still no clear evidence of that.

Analysts at Citi, for instance, said they were seeing a "return to safe haven" theme in trading patterns.

"The return of better foreign real (money) buying in long-end paper in both (North American) and Asia hours was viewed as an encouraging sign," they said in a note on Friday. "While diplomatic signal transmission remains full of imperfections, the perception that we’re beyond 'peak trade uncertainty' has gained a foothold in core rates," they said.

Benchmark 10-year yields US10YT=RR were last at 4.284%, down about two basis points from Thursday. Two-year yields US2YT=RR were roughly unchanged at 3.79%. Further out, 30-year yields US30YT=RR declined to 4.733% from 4.766% on Thursday.

The closely watched curve comparing two- and 10-year yields stood at 49 basis points - flatter than earlier this week. A flattening curve, which happens when the difference between short-term and long-term yields decreases, typically indicates increased investor expectations of slower economic growth over the long term or potential monetary policy easing.