Yield curve steepest since 2022, supply weighs on long end

• Two-, 10-year yield curve steepest since Feb. 2022
• US raises tariffs on Chinese imports
• Soft demand for $58 billion three-year note auction

April 8 (Reuters) - The U.S. Treasury yield curve reached its steepest level since February 2022 on Tuesday as longer-dated yields jumped on supply concerns, with some holders of the debt also seen as likely being forced to sell due to recent market volatility.

An intensifying U.S.-China trade war also raised concerns about slowing growth, which sent shorter-dated yields lower on the day.

The curve between two- and 10-year note yields US2US10=TWEB steepened sharply to 57 basis points, as the two maturities moved in opposite directions on a volatile day of trading.

The benchmark 10-year yield rose to an 11-day high on worries about weak demand for longer-dated U.S. government debt before a sale of the notes on Wednesday.

"We've got the 10-year auction tomorrow, so I think that's keeping some pressure on the market," said Kim Rupert, a managing director at Action Economics.

Soft demand for the U.S. Treasury's $58 billion auction of three-year notes fueled worries about tepid interest in the $39 billion sale of 10-year notes and a $22 billion auction of 30-year bonds on Thursday.

Tuesday's three-year auction, however, showed pockets of strength with indirect bidders, which includes foreign central banks, taking a larger-than-normal share of the sale. "Fears of a lack of foreign demand might be allayed a little bit," Rupert said.

A sharp rise in Treasury yields on Monday raised speculation that leveraged investors are selling U.S. Treasuries to meet margin calls and de-risk their portfolios due to stock market losses and volatility.

The market is also concerned that large foreign holders of Treasuries including China could offload their debt or abstain from new purchases, which could also weigh on the market.

China held $761 billion in Treasuries as of January.

The U.S. fiscal outlook is also weighing on longer-dated U.S. debt as top Republicans in the House of Representatives plan to move forward this week on Trump's tax cuts.

Shorter-dated yields were pulled lower, meanwhile, after the United States said that 104% duties on imports from China will take effect shortly after midnight , even as the Trump administration moved to quickly start talks with other trading partners targeted by President Donald Trump's sweeping tariff plan.

"In the event that the bulk of the recently announced tariffs are not ultimately rolled back, then a bout of stagflation driven by sticky imported goods inflation is the 'best worst case' outcome," BMO Capital Markets interest rate strategists Ian Lyngen and Vail Hartman said on Tuesday in a report.

The market was earlier more optimistic that Trump will strike deals with trading partners that may limit the expected economic fallout from tariffs.

The Trump administration is negotiating trade agreements with countries, including Japan, and Treasury Secretary Scott Bessent said the discussions are the result of multiple calls from other countries and not sliding financial markets.

The 10-year note yield US10YT=RR was last up 12.6 basis points on the day at 4.283%. It fell to 3.86% on Friday, the lowest since October 4.

The interest-rate sensitive two-year yield US2YT=RR reversed an earlier increase and fell 2.3 basis points to 3.715%. It had reached 3.435% on Monday, the lowest since September 2022.

Fed funds futures traders also raised bets on when and how many times the Federal Reserve may cut rates this year. They are now pricing in 105 basis points of cuts by year-end and a more than 50% chance that the first cut will come in May.

The Fed will release minutes from its March 18-19 meeting on Wednesday.

San Francisco Fed President Mary Daly said on Tuesday that with the economy strong and a lot still unclear about the effect of the Trump administration's new policies, the U.S. central bank should not rush to adjust interest rates.