TREASURIES-Prices slip as tariff rhetoric escalates, Fed in no rush to cut rates

Recasts, adds new comments, graphic, updates prices

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 11 (Reuters) - U.S. Treasury prices fell on Tuesday, pushing yields higher, pressured by comments from Federal Reserve Chair Jerome Powell saying the Fed is not in a rush to cut interest rates as well as persistent worries about tariffs after steep duties imposed on all steel and aluminum imports.

In afternoon trading, the U.S. benchmark 10-year yield rose 4.2 bps to 4.537% US10YT=RR, rising for a fourth-straight session. U.S. 30-year yields also increased, up 4.2 bps at 4.753% US30YT=RR.

On the short end of the curve, the two-year yield, which tracks policy moves by the Fed, gained 2.2 bps to 4.289% US2YT=RR, after earlier hitting its highest in three weeks of 4.298%.

The tariff backdrop could push the Fed to hold interest rates unchanged for a longer period than expected, or even hike them, some analysts said.

The U.S. rate futures market on Tuesday priced in about 36 basis points (bps) of easing this year, or one rate cut of 25 bps, with the first rate reduction now seen at the July or September Fed policy meeting. Futures traders had priced in for many weeks more than an even chance of easing in June.

The Fed, in its dot plot or rate forecast released in December, has penciled in two rate decreases this year.

"Today's move was probably in response to Powell, which is a confirmation of what we already knew," said John Velis, Americas macro strategist, at BNY in New York.

"There's some tariff risk as well in the rate move today. But the rates market has been relatively, in my opinion, immune to tariff conversation...and more (sensitive) about inflation and the U.S. data."

Fed Chair Powell on Tuesday said the central bank is not in a hurry to ease rates given an economy that is "strong overall" and inflation that remains above its 2% target. Powell's comments were in line with market expectations, and were delivered at a Senate Banking Committee hearing.

"He (Powell) made it very clear...he is happy keeping rates where they are indefinitely at a time when he surely knows that the futures market does not have the next full rate cut occurring until September," wrote Dave Rosenberg, founder and president of Rosenberg Research, in a note to clients.

"That is bound to change, and in our view, the Fed will be easing again sooner and harder than is currently being discounted."

TARIFF FATIGUE

Meanwhile, a tariff-fatigued bond market remained sensitive to comments on this front, including the prospect of trade wars.

President Donald Trump late on Monday signed proclamations raising the U.S. tariff rate on aluminum and steel to 25% from his previous 10% rate and eliminating country exceptions and quota deals, as well as hundreds of thousands of product-specific tariff exclusions for both metals. The tariffs will take effect next month, stoking worries about reaccelerating inflation.

Trump's move sparked condemnation from the European Union, Canada and Mexico.

"Tariffs by themselves are inflationary," said Brian Reynolds, chief market strategist at Reynolds Strategy in Massachusetts. But they can also lead to lower inflation, Reynolds said, because tariffs essentially tend to lower demand as well.

In other parts of the bond market, the yield curve steepened, with the spread between two-year and 10-year yields at 24.3 bps US2US1O=TWEB, compared with 21.8 bps late Monday. The curve showed that investors were selling the long end of the curve more than the front end, resulting in higher yields for the former.

"We know that long duration Treasuries are not being bought right now by foreign investors in particular because it's too volatile," said BNY's Velis. Some analysts also cited the policy uncertainty in the United States over a longer-term horizon with the new administration, making investors cautious about longer-dated debt.

Also on Tuesday, the Treasury sold $58 billion in U.S. three-year debt, showing strong demand. The note was priced at 4.3%, lower than the expected rate at the bid deadline, suggesting that investors did not ask for a premium on the yield in order to purchase the three-year note.

The bid-to-cover ratio, a gauge of demand, was 2.79, higher than the 2.62 figure in January and the 2.57 average. End-user demand also rose to 89.8%, up from the 80.6% last month and the 83.5% average, according to Action Economics.