TREASURIES-Tariff worries push yields higher, despite slowing inflation

By Karen Brettell

March 12 (Reuters) - U.S. Treasury yields rose on Wednesday as concerns over the potentially inflationary impact of a global trade war offset optimism over slowing consumer price gains, after data showed that prices rose less than expected in February.

Some underlying components of the data that feed through to personal consumption expenditures, the Federal Reserve’s preferred inflation measure, were also higher than expected.

“This is the last reading not impacted by tariff distortions so to some extent the market's a little bit hesitant to over react to a better print,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York. “The transmission to PCE is actually a little bit stronger.”

The consumer price index rose 0.2% last month after accelerating 0.5% in January. Excluding the volatile food and energy components, the CPI climbed 0.2% in February after gaining 0.4% in January.

U.S. President Donald Trump's increased tariffs on all U.S. steel and aluminum imports took effect on Wednesday, stepping up a campaign to reorder global trade in favor of the U.S. and drawing swift retaliation from Canada and Europe.

February's producer price inflation report on Thursday will also be evaluated for how it will impact PCE, which will be released on March 28.

Meanwhile a bond market rally that last week sent benchmark 10-year yields to their lowest levels since October is also seen as potentially played out for the near-term.

“The market's already rallied quite a bit over the last couple of weeks. There is a little bit of hesitation about pushing rates too far lower in advance of a lot of the uncertainty that's coming,” Goldberg said.

The yield on benchmark U.S. 10-year notes US10YT=RR was last up 2.1 basis points on the day at 4.309%. The 2-year note US2YT=RR yield rose 3.5 basis points to 3.976%.

The yield curve between two-year and 10-year notes US2US10=TWEB was last at 33 basis points.

Traders are also watching developments in peace talks to end the war between Russia and Ukraine.

The Kremlin said on Wednesday it was awaiting details from Washington about a proposal for a 30-day ceasefire in Ukraine while senior Moscow sources said a deal would have to take account of Russia's advances and address its concerns.

The Treasury will sell $39 billion in 10-year notes on Wednesday, the second sale of $119 billion in coupon-bearing debt this week.

It sold $58 billion in three-year notes on Tuesday and will also auction $22 billion in 30-year bonds on Thursday.