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Treasury yields higher on day on tariff optimism

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Two-year yields earlier reach lowest since September 2022

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Tariff uncertainty expected to keep market volatile

(Updated in late New York morning time)

By Karen Brettell

NEW YORK, April 7 (Reuters) - U.S. Treasury yields rebounded on Monday on rising optimism that some countries may negotiate deals with U.S. President Donald Trump to avoid trade tariffs.

Trading was choppy, however, as traders continued to try to gauge how long trade levies will last and to what degree they will dent economic growth.

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.

"Yields are higher today off of the prospects that there may be some tariff relief," said Angelo Manolatos, a macro strategist at Wells Fargo. "But when we think about the bigger picture, we expect a large hit to growth this year and much lower Treasury yields."

Yields also rallied sharply but briefly on a report that Trump may pause tariffs for all countries except China for 90 days, though this was denied by the White House.

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 were last up 12.8 basis points on the day at 4.119%. They fell to 3.86% on Friday, the lowest since October 4.

Interest-rate sensitive two-year yields rose 2.9 basis points to 3.699%. They earlier reached 3.435%, the lowest since September 2022.

The yield curve between two-year and 10-year notes was last at 42 basis points, after reaching 45 basis points, the steepest since January 13.

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.

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 96 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. (Reporting by Karen Brettell; Additional reporting by Rae Wee and Harry Robertson; Editing by Sam Holmes, Alex Richardson, Sharon Singleton and Andrea Ricci)