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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.