TREASURIES-Yields edge higher with risk aversion less pronounced

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Two-year Treasury yield hits five-month lows

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Spreads on US government one-year credit default swaps hit widest level since November 5

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Junk corporate bond spreads widen to widest level since September

(Updates as of 11:15 EDT)

By Matt Tracy

WASHINGTON, March 11 (Reuters) - U.S. Treasury yields ticked higher on Tuesday, rebounding after the two-year yield hit five-month lows earlier in the session, as a risk-off mentality abated in world markets a day after a Wall Street selloff.

The two-year Treasury yield was trading at around 3.91% on Tuesday morning, up 1.6 basis points from late Monday and from as low as 3.83% during Asian hours, which was the lowest level since October 4.

Ten-year yields were up 4.6 bps at 4.259%, holding above last week's near 4-1/2-month low.

On Monday, two-year yields fell around 10 basis points in their biggest daily drop since September after U.S. President Donald Trump declined to rule out a recession as a result of his tariff policies.

Wall Street stocks also suffered heavy losses on Monday but were steadier and mixed on Tuesday in a sign that sentiment was recovering. That shift took some shine off safe-haven bonds.

"It's challenging to decipher Trump's policy and its impact on the Treasury market," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

Maxia is neutral on Treasuries, but said his view could change "if we have strong evidence of a significant weakening of the U.S. economy. We have just seen some alarm bells as of now."

But in one worrying sign for the bond market, a measure of default risk was creeping higher again.

Spreads on U.S. government one-year credit default swaps - market-based gauges of the risk of a default - widened to 43 bps on Monday and held at that level on Tuesday. This is their widest level since November 5, the day of U.S. elections.

Junk corporate bond spreads widened to more than 300 bps on Tuesday morning, their most since September, in a sign that investor confidence is deteriorating as worries about a recession and global trade war rise.

Treasury yields were little moved after the release of economic data that met expectations. The latest job opening figures for January showed 7.7 million vacancies last month. Meanwhile the NFIB Small Business Optimism Index fell by 2.1 basis points in February to 100.7.

"Optimism is fading a little bit, but it's still far from certain that we're going to see negative economic growth," said Guy LeBas, chief fixed income strategist at Janney Capital Management.

"It's hard to draw a line through any one data point," he added.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 35 basis points, the same level as Monday's close.

"The distribution of possible outcomes has increased with the tariffs, and you could see a possible slowdown from job loss," said Mike Sanders, portfolio manager and head of fixed income at Madison Investments.

"I think in general you're going to have (Treasury) spreads just trade a little directionally with where equities are going to trade, but it's going to be a bumpy couple of months until you see a conclusion of what's getting implemented."

(Reporting by Dhara Ranasinghe in London and Stefano Rebaudo in Milan; editing by Christina Fincher and Rod Nickel)