TREASURIES-Yields rise as trade war escalates, raising inflation fears

By Karen Brettell

NEW YORK, March 13 (Reuters) - U.S. Treasury yields rose on Thursday on concerns about the potential for higher inflation as a war over tariffs between the United States and trading partners escalates.

U.S. President Donald Trump said on Thursday that he would put a 200% wine tariff on all wines and other alcoholic products coming out of the European Union if the bloc did not remove its tariff on whiskey.

Trump's 25% duties on all U.S. steel and aluminum imports took effect on Wednesday and he threatened further tariffs on EU goods, as major U.S. trading partners said they would retaliate for trade barriers already erected by the U.S. president.

“There's a tremendous amount of uncertainty due to all these tariffs,” said Tom di Galoma, managing director at Mischler Financial Group.

Yields rose despite data showing U.S. producer prices were unexpectedly unchanged in February. Traders view the report as backward-looking as it covers the period before tariffs were put in place.

Some underlying components in the inflation report were also less benign than the headline suggests.

"The cooler-than-expected February PPI included some relatively hot increases in the components that feed into the Fed’s preferred PCE deflator," Will Compernolle, macro strategist at FHN Financial, said in a report.

The Federal Reserve's favorite inflation indicator, personal consumption expenditures, is due on March 28.

Other data on Thursday showed that the number of Americans filing new applications for unemployment benefits fell last week, though traders remain on alert for a sharp increase as the federal government implements large layoffs.

The yield on benchmark U.S. 10-year notes US10YT=RR was last up 2.5 basis points on the day at 4.341%. The 2-year note US2YT=RR yield rose 0.6 basis points to 4.001%.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened by around two basis points to 34 basis points.

The yield curve has steepened month in line with moves in European government debt, di Galoma said.

Yields on German bunds have jumped on plans by German politicians to massively increase fiscal spending.

The Treasury will sell $22 billion in 30-year bonds on Thursday, the final sale of $119 billion in coupon-bearing debt this week.

The U.S. government saw fair demand for a $39 billion sale of 10-year notes on Wednesday and a $58 billion auction of three-year notes on Tuesday.