Adds new comment, graphic, updates prices

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 3 (Reuters) - U.S. short-dated Treasury yields advanced on Monday in volatile trading, while those on long-dated debt slipped, as investors worried about the inflationary and growth impact of U.S. President Donald Trump's tariffs on Canada, Mexico and China.

The move in yields flattened the yield curve, with the gap between two-year and 10-year Treasury yields hitting 24.7 basis points (bps) US2US10=TWEB earlier in the session, the narrowest gap since late December. The curve was last at 28 bps, compared with 33.8 bps late Monday.

Yield curves typically steepen in a rate-cutting cycle, with rates on the long end higher than those on the short end, which are tethered to the Federal Reserve's policy rate cuts. On the other hand, investors generally sell the long end of the curve, anticipating that Fed easing will eventually lead to inflation.

"The short end of the curve is focused on the inflationary impact of tariffs. And the long part is reacting to potential economic weakness tied to the tariffs," said Jim Barnes, director of fixed income, at Bryn Mawr Trust in Berwyn, Pennsylvania.

"We are in a period of heightened volatility and we'll likely have a lot of back and forth before the market finds its footing. And so the Fed will stay on the sidelines...and will be patient and see what these policies end up doing," he added.

Trump's 25% tariffs on Canada and Mexico and 10% tariffs on China - the United States' three largest trading partners - earlier rocked global markets on Monday. Financial markets later stabilized after Trump said he will delay tariffs on Mexico by a month following a dialogue with Mexican President Claudia Sheinbaum.

He did say, however, that his administration will also impose tariffs on the European Union.

U.S. front-end yields have shuttled between gains and losses, indicating an uncertain outlook on inflation due to tariffs that could prompt a lengthy pause on rate cuts by the Fed. Treasury yields on the back end, on the other hand, fell as investors bought longer-dated debt amid fears tariffs could undermine U.S. growth.

TARIFF IMPLICATIONS

"The market is trying to figure out what the tariffs are going to mean: are they inflationary, are they going to slow growth, are they going to cramp a Fed rate cut?," said Kim Rupert, managing director, global fixed income analysis, at Action Economics in San Francisco. "People don't know how to price so many uncertainties."

In afternoon trading, the benchmark 10-year Treasury yield US10YT=RR slipped 2.4 bps to 4.543%.

U.S. 30-year Treasury yields US30YT=RR slid 4.1 bps to 4.771%.

On the front end of the curve, two-year Treasury yields US2YT=RR, which are particularly sensitive to Fed policy, rose 2.5 bps to 4.261%.

U.S. economic data on Monday were positive overall, although there was little reaction to the economic reports. U.S. data showed that manufacturing grew for the first time in more than two years in January. The Institute for Supply Management said its manufacturing PMI increased to 50.9 last month, the highest reading since September 2022, from 49.2 in December.

A report showing U.S. construction spending increased more than expected in December was also largely shrugged off. Spending rose 0.5% after an upwardly revised 0.2% increase in November.

The impact of the tariffs, meanwhile, was clearer in Europe.

Germany's two-year yield DE2YT=RR, which is sensitive to expectations about European Central Bank interest rates, earlier fell to 2.01%, the lowest since Dec. 20. It was last up 2.9 bps at 2.066%.

U.S. rate futures, meanwhile, have priced in about 41 bps of easing this year, down slightly from 42 bps late Friday, according to LSEG calculations. The first rate cut will likely occur at the Fed's June policy meeting.

Tariffs, in theory, slow growth which ought to support bonds. However, they also raise prices and potentially give companies cover for further price hikes or for consumers to start to expect price rises and press for higher wages.

A closely watched market-based gauge of long-term U.S. inflation expectations ticked up slightly to 2.57% on Monday, from 2.55% on Friday USIL5YF5Y=R.

(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Harry Robertson in London and Tom Westbrook in Singapore; Editing by Angus MacSwan and Lisa Shumaker)

((harry.robertson@thomsonreuters.com; tom.westbrook@tr.com; gertrude.chavez@thomsonreuters.com; 646-301-4124))