TREASURIES-Sideways trade and mixed yields as investors await Fed

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U.S. Treasury selling $42 billion of 10-year notes

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Fed seen keeping interest rates on hold Wednesday

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10-year Treasury yield touches highest since April 23

By Alden Bentley

NEW YORK, May 6 (Reuters) - U.S. Treasury yields were mixed in subdued trade on Tuesday before the Federal Open Market Committee starts its two-day policy meeting, with investors also keen to get a read on demand at the benchmark 10-year note auction later in the day.

The Treasury will sell $42 billion of the 10-year, with the results due just after 1 p.m. ET/1700 GMT. More coupon supply comes on Thursday, when it will sell $25 billion of 30-year bonds.

Meanwhile, Fed policymakers gather Tuesday and are expected to leave interest rates unchanged when their meeting wraps up Wednesday afternoon. But President Donald Trump's erratic approach to import tariffs is creating uncertainty at the Fed and complicating its job.

"I think everyone's still really waiting for the FOMC battening down the hatches there," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

Bond investors have taken a neutral stance, reflecting caution over whether U.S. trade policy will tip the world's largest economy into recession.

They said they are staying neutral relative to their benchmarks, reducing their long-duration exposure, or preferring to remain on the shorter end of the yield curve.

Fed policymakers expect the tariffs to increase both inflation and unemployment, although to what degree and for how long is unclear.

The data so far does not suggest the economy is crumbling. Despite the 0.3% annualized decline in U.S. GDP last quarter, consumer spending still grew at a decent 1.8% pace. The closely-watched payrolls report on Friday showed that employers added 177,000 jobs in April - roughly 40,000 more than forecast - and the unemployment rate remained steady at 4.2%.

The Fed fund futures term structure shows traders are betting on the Fed lowering the rate by 25 basis points in July, which would be the first cut since it put its easing on hold in December, with the rate at 4.25%-4.50%. Another two quarter point cuts are fully priced in by year-end.

The yield on the benchmark U.S. 10-year Treasury note touched 4.378%, its highest since April 23, and was up 1 basis point from late Monday at 4.353%.

Goldberg said demand at recent auctions has been ok, with the market zeroing in on allotment data from foreign investors, who had been thought to have been shunning dollar-based assets, including safe-haven Treasuries, given the wild swings since Trump kicked off his tariff roller-coaster on April 2.

"Markets have treated every single auction as a risk event," he said, adding that foreign uptake at recent auctions had not changed dramatically.

The yield on the 30-year bond rose 3 basis points to 4.859%.

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 a positive 55.2 basis points, steepened from 50.9 bps late Monday.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 4.2 basis points to 3.799%. (Reporting by Alden Bentley Editing by Mark Potter)