Cautious optimism markets may stabilize after sharp volatility
But trade deal hopes may not last long
Perceived Fed's flexibility on rate cuts helps push yields lower
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Yield curve 'bull-flattens' on cloudy economic outlook
(Adds analyst comments, economic data, graphic; updates market levels)
By Davide Barbuscia
NEW YORK, April 25 (Reuters) - U.S. Treasury yields declined on Friday amid 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 as economic activity slows.
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.
The release of the University of Michigan Surveys of Consumers on Friday showed U.S. consumer sentiment ebbed for a fourth straight month in April amid concerns about the economic impact of tariffs. The Consumer Sentiment Index came in at 52.2 this month, higher than a reading of 50.8 two weeks ago, but down sharply from 57.0 in March.
"The final release of the University of Michigan´s consumer survey was a bit better than the preliminary estimate, but still terrible," said Bill Adams, chief economist for Comerica Bank, in a note. "Consumers are freaked out about tariffs, the stock market, inflation, and recession fears," he said.
Consumers' 12-month inflation expectations came in at 6.5%, thrivetriospace down from 6.7% earlier this month and up from 5.0% in March. Inflation expectations were still the highest since 1981.
'SAFE HAVEN' BID
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 were last at 4.266%, down about four basis points from Thursday. Two-year yields were about three basis points lower at 3.762%. Further out, 30-year yields declined to 4.739% from 4.766% on Thursday.
The closely watched curve comparing two- and 10-year yields stood at 50 basis points - flatter than earlier this week.
"We're starting to see some signs of economic slowdown and I think that may be reflected in this bull flattening of the curve that we're seeing," said Jan Nevruzi, U.S. rates strategist at TD Securities in New York.
A bull-flattening yield curve, which happens when a reduction of the yield gap between short-term and long-term Treasuries is driven by long-dated yields, typically indicates increased investor expectations of slower economic growth over the long term or potential monetary policy easing.
(Reporting by Davide Barbuscia; Editing by Susan Fenton and Chizu Nomiyama)