* Stocks slump as investors seek safety in government debt

* Two-year yield stays near February 2025 highs after

touching 4.236% Monday

* Core PCE seen rising 0.3% in May, with annual rate

forecast at 3.4%

* Treasury to auction $183 billion in notes this week,

starting with $69 billion Tuesday

By Karen Brettell

NEW YORK, June 23 (Reuters) - U.S. Treasury yields fell on

Tuesday as a stock market selloff drove investors toward the

safety of government debt. Short-dated yields, however, held

near 16-month highs as traders continued to weigh the prospect

of a more hawkish Federal Reserve.

The Nasdaq and the S&P 500 fell to over one-week lows, dragged

down by sharp losses in semiconductor stocks as investors braced

for a more hawkish U.S. central bank and scrutinized growing

debt-funded AI spending.

Treasury yields have climbed since the Fed held interest rates

steady last Wednesday, after policymakers signaled they expect

to raise borrowing costs later this year amid persistent

inflation running above the central bank's 2% target.

"The committee spoke pretty loudly in that summary of

economic projections with a 'dot plot' that really made a

material hawkish turn," said Michael Lorizio, head of U.S. rates

and mortgage trading at Manulife Investment Management.

Chicago Fed President Austan Goolsbee also said on Monday that

with the labor market on solid footing, his focus is on whether

stubbornly high inflation will prove lasting or gradually ease

as the impact of elevated tariffs fades and tensions in the

Middle East stabilize.

U.S. President Donald Trump said on Tuesday Iran had agreed to

nuclear inspections into "infinity," despite Tehran's denials,

and that unfrozen Iranian assets would be used to buy

humanitarian supplies from the United States.

The 2-year note yield, which typically moves in

step with Fed interest rate expectations, fell 3.8 basis points

to 4.192%. It reached 4.236% on Monday, the highest since

February 2025.

The yield on benchmark U.S. 10-year notes fell

2.8 basis points to 4.479%.

The yield curve between two- and 10-year notes

steepened to 28.7 basis points.

In an early sign of new Fed Chairman Kevin Warsh's

influence, last week's policy statement was notably stripped of

any forward guidance on future rate moves, instead simply

stating the rate decision and reaffirming the Fed's commitment

to maintaining "ample reserves in the banking system."

With less guidance to lean on, analysts now expect economic

data to play an even bigger role in shaping Fed expectations.

The week's main release will be the PCE inflation report on

Thursday.

"We're going to get a stark reminder of the potential need

for higher rates when we get PCE on Thursday, and that's

something that's quite uncomfortable for the Fed," said Lorizio.

Core prices in the PCE report are expected to have risen

0.3% in May, putting the annual rate at 3.4%. Headline inflation

is forecast at 0.5% for the month and 4.1% year-over-year.

The Treasury Department will sell $69 billion in two-year

notes on Tuesday, kicking off $183 billion in short- and

intermediate-term coupon-bearing note auctions this week. It

will also sell $70 billion in five-year notes on Wednesday and

$44 billion in seven-year notes on Thursday.