TREASURIES-Tariff worries push yields higher, despite slowing inflation

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Consumer price inflation rose less than expected in February

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Treasury sees good demand for 10-year note auction

(Updated in New York afternoon time)

By Karen Brettell

March 12 (Reuters) -

U.S. Treasury yields rose on Wednesday on the potentially inflationary impact of a global trade war, offsetting optimism over slowing consumer price gains in February.

Underlying components of the data that feed through to personal consumption expenditures, the Federal Reserve's preferred inflation measure, were 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," he added.

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.

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.

A bond market rally that last week sent benchmark 10-year yields to their lowest levels since October is 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 was last up 3 basis points on the day at 4.318%. The 2-year note yield gained 5.6 basis points to 3.997%.

The yield curve between two-year and 10-year notes flattened by around 2 basis points to 32 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 saw good demand for a $39 billion sale of 10-year notes on Wednesday, the second sale of $119 billion in coupon-bearing debt this week.

The notes sold at a high yield of 4.310%, around half a basis point below where they traded before the auction. Demand was 2.59 times the amount of debt on offer, the highest ratio since December.

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

The spreads between the yields on corporate bonds and U.S. Treasuries, meanwhile, hit their widest since September this week, pointing to mounting investor worries about recession and a global trade war. (Reporting by Karen Brettell; Editing by Paul Simao, Angus MacSwan and Leslie Adler)