TREASURIES-Short-dated yields rise as traders struggle to price tariff shock

(Updates in European trading hours)

By Harry Robertson and Tom Westbrook

LONDON/SINGAPORE, Feb 3 (Reuters) - Short-dated Treasury yields climbed on Monday while those on longer-dated bonds fell as impending U.S. tariffs on Canada, Mexico and China sent investors scrambling to work out the implications for Federal Reserve interest rates.

U.S. President Donald Trump's plan to impose 25% tariffs on Canada and Mexico and 10% tariffs on China - the United States' three largest trading partners -

rocked global markets

on Monday.

Most currencies tumbled against the dollar and European stocks and U.S. futures fell sharply as investors assessed the potential hit to the global economy. The dollar index, which measures the U.S. currency against six peers, rose more than 1% .

The reaction in the bond market was less clear cut, however, given that tariffs raise the risk of higher prices but slower growth in the United States, potentially pulling the Fed in different directions.

Two-year Treasury yields, which are particularly sensitive to Fed policy, wavered and were last up 3 basis points (bps) at 4.263%, around their highest in a week. Yields move inversely to prices.

Yet longer-dated bond yields fell, with some analysts saying investors were buying safe assets as they sold equities.

The benchmark 10-year Treasury yield fell around 7 bps in Asian trading hours but was last down 3 bps at 4.533%.

Meanwhile, 30-year Treasury yields were down 5 bps at 4.764%, having also fallen around 7 bps in Asian hours.

"Rates (government bond markets) will struggle between the inflationary impact which would push rates higher and growth impact which would push them lower," said Mohit Kumar, European economist at Jefferies.

"Our view would be that the risk aversion moves dominate, but still see limited impact on rates."

The impact of the tariffs was clearer in Europe, which Trump said he would also hit with levies although did not specify when.

Germany's two-year bond yield, which is sensitive to expectations about European Central Bank interest rates, fell 7 bps to 2.042%, its lowest level since the start of the year.

Traders moved to price in fewer U.S. interest rate cuts this year, with money markets pointing to 39 bps of reductions by the end of December, down from 43 bps on Friday.

Tariffs, in theory, slow growth which ought to support bonds. However, they also raise prices and potentially give companies cover for further price hikes or for consumers to start to expect price rises and press for higher wages.

"Increased U.S. tariffs underscore our view 10-year Treasury yields will rise to 5% as a second Trump term boosts inflation," said, Mansoor Mohi-uddin, chief economist at Bank of Singapore, the private banking arm of OCBC Bank.

A closely watched market-based gauge of long-term U.S. inflation expectations ticked up slightly to 2.58% on Monday, from 2.55% on Friday.

(Reporting by Harry Robertson in London and Tom Westbrook in Singapore; Editing by Sonali Paul, Edwina Gibbs and Toby Chopra)