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Tariff uncertainty remains lingering concern

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Focus on US three-year note auction

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US two-year yield hits highest in three weeks

(Recasts, adds new comments, byline, bullets, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 11 (Reuters) - U.S. Treasury prices fell

on Tuesday, pushing yields higher, as investors grew cautious

about steep tariffs on all steel and aluminum imports that will

take effect next month, stoking worries about reaccelerating

inflation.

It is a scenario that could push the Federal Reserve to hold

interest rates unchanged for a longer period than expected, or

even hike them. The U.S. rate futures market has priced in about

36 basis points of easing this year, or one rate cut of 25 bps,

with a roughly 44% chance of another rate cut in 2025.

President Donald Trump signed proclamations late on Monday

raising the U.S. tariff rate on aluminum to 25% from his

previous 10% rate and eliminating country exceptions and quota

deals, as well as hundreds of thousands of product-specific

tariff exclusions for both metals. That move sparked

condemnation from the European Union, Canada and Mexico.

"What's driving the market is uncertainty and tariffs are

part of that uncertainty: whether tariffs will increase

inflation or decrease (inflation)," said Brian Reynolds, chief

market strategist at Reynolds Strategy in Massachusetts.

"Tariffs by themselves are inflationary. However, when the

president announces tariffs, it sends the stock market lower,

but then the next step is that decreases demand, which would

lower inflation."

In late morning trade, the U.S. benchmark 10-year yield rose

4.8 bps to 4.543%, rising for a fourth-straight

session. U.S. 30-year yields also increased, up 4.1 bps at

4.751%.

On the short end of the curve, the two-year yield, which

tracks policy moves by the Fed, gained 2.6 bps to 4.294%

, after earlier hitting its highest in three weeks, of

4.298%.

Treasury yields slightly extended gains after Fed Chair

Jerome Powell said the central bank is not in a rush to cut

interest rates given an economy that is "strong overall" and

inflation that remains above its 2% target. Powell's comments

were in line with market expectations.

"We do not need to be in a hurry to adjust our policy

stance. We know that reducing policy restraint too fast or too

much could hinder progress on inflation," Powell said, in

remarks prepared for delivery at a Senate Banking Committee

hearing on Tuesday.

Bradley Saunders, North America economist at Capital

Economics, wrote in a research note after Powell's comments that

while there was no "explicit mention" of tariffs in Powell's

statement or in the communication surrounding last month's

monetary policy decision, the "erratic policymaking of President

Trump" is on the minds of Fed policymakers as the central bank

considers its next move.

"Amid such uncertainty, we see little chance of interest

rate cuts this year," Saunders said.

Also on Tuesday, the Treasury will sell $58 billion in U.S.

three-year debt and strategists at JPMorgan believe the auction

will go smoothly, given the note's attractive valuations. The

three-year note, JPMorgan said, has "underperformed along the

curve" and looked about 1.3 bps cheaper.