TREASURIES-Treasury market catches breath before retail sales data and Powell

By Alden Bentley

NEW YORK, April 15 (Reuters) - Yields on U.S. Treasury debt were little changed early on Tuesday as traders marked time before midweek data on consumer activity and a speech from the head of the Federal Reserve, with little new on the tariff front to rekindle last week's bond rout.

The benchmark 10-year Treasury note yield gyrated mildly on the back of a stronger-than-expected April New York State manufacturing index, and a surprising decline in March import prices. The market reset to near flat after U.S. stock indexes opened higher, a good sign that the panic that gripped markets last week was subsiding.

Tuesday's two secondary economic releases did not support the "stagflation" narrative that has been difficult for investors and Fed policymakers to navigate in recent weeks.

The 10-year yield US10YT=TWEB was unchanged from late Monday at 4.364%.

"The market is taking a little bit of an opportunity to take its breath," said Nate Thooft, chief investment officer of multi-asset solutions and senior portfolio manager at Manulife Investment Management in Boston. "We're still a little bit worried that there's been some damage done to the overall perception of U.S. assets including both the dollar and the Treasury (market.)"

The S&P 500 opened up 0.21%. Investors were content to take it easier before the Good Friday market holiday and a long weekend, but were far from complacent after the freak-out on the back of U.S. President Donald Trump's April 2 announcement of bigger-than-expected tariffs on trading partners, and sudden about-face offer of a 90-day pause for most countries.

"Arguably a bigger relief for investors was the recovery in the bond market, which eased fears about some sort of serious financial turmoil developing," Deutsche Bank wrote in Tuesday's Macro Strategy note. "Investors had already been alarmed, and last week’s +49.5 bp jump in the 10-year Treasury yield was the biggest weekly jump since 2001, with the yield moving higher every day last week. However, that began to reverse yesterday."

Hedge funds and other asset managers offloaded bonds last week, sending yields sharply higher, after receiving margin calls and posting sharp losses from market volatility, analysts said.

The shakeout brought dislocations across fixed-income and derivatives markets, although widespread talk of a significant unwind of basis trades arbitraging the gap between cash Treasuries and bond futures prices was not borne out by Commodity Futures Trading Commission hedge fund position data on Friday.

"We did not see a full unwind of that risk. And so if anxiety rises again and we get significant news on the tariff front that increases that anxiety, increases market volatility again, we are likely to see a greater significance of that unwind," Thooft said.

Wednesday holds the possibility for more action, with retail sales data and a presentation by Fed Chair Jerome Powell.

The two-year US2YT=TWEB yield, which typically moves in step with interest rate expectations, was 0.2 basis points (bp) lower at 3.83%.

The yield on the 30-year bond US30YT=TWEB was 1.3 bp above Monday's late level, at 4.811%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was barely changed at +53.2 bp.

Trump's tariff war will be a challenge for the Fed if a recession comes and inflation moves away from its 2% target. The term structure in fed funds futures 0#FF: shows traders are betting on at least a 25 basis point cut by the Federal Open Market Committee at each of its June and July meetings, with another in October and a close call in December. The rate has been at 4.25% to 4.50% since December.