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China's tariffs escalate trade war, sends US Treasury yields lower

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US jobs report exceeds expectations

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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.

(Reporting by Chuck Mikolajczak; additional reporting by Rae Wee in Singapore and Yadarisa Shabong in Bengaluru; Editing by Chizu Nomiyama)