NEW YORK - U.S. Treasury yields fell from 3-1/2 week highs on Tuesday as souring risk appetite increased demand for the safe haven debt, and before the United States Treasury Department will sell three-year notes.

Stocks opened lower after Target Corp's quarterly margin forecast cut raised worries about slowing demand in an inflationary environment and dragged down retail shares.

Expectations that the Federal Reserve will next week hike rates by 50 basis points and strike a hawkish tone on further tightening as it tackles high inflation is also reducing risk appetite, said Tom di Galoma, managing director at Seaport Global Holdings in New York.

“Powell needs to be pretty hawkish and I think that’s why we’re seeing this risk off move ahead of the Fed next week,” di Galoma said.

Benchmark 10-year note yields fell four basis points to 2.996% after reaching 3.064% overnight, the highest since May 11. Two-year note yields declined two basis points to 2.710%, after earlier reaching 2.759%. Yields rose overnight as investors readied for this week’s new debt supply.

The U.S. Treasury will sell $44 billion in three-year notes on Tuesday, the first auction of $96 billion in new supply this week. The government will also issue $33 billion in 10-year notes on Wednesday and $19 billion in 30-year bonds on Thursday.

Three-year note yields fell four basis points to 2.903%. Inflation data due on Friday is expected to show that consumer prices rose 0.7% in May, compared with 0.3% in April, with annual inflation unchanged at 8.3%, according to the median estimate of economists’ polled by Reuters.

The persistently high inflation could increase bets that the U.S. central bank will remain hawkish for months to come as it tries to subdue prices that are rising at the fastest pace in 40 years.

The Fed is expected to raise rates by 50 basis points each at its June and July meetings, with an additional 50 basis point increase also possible in September. Fed fund futures indicate the Fed’s benchmark rate is expected to rise to 3.21% by March, from 0.83% now.

Ten-year yields dropped from 3-1/2-year highs last month on speculation that the U.S. central bank could pause its rate hikes after July if economic data weakens. But Fed officials including Vice Chair Lael Brainard last week played down the likelihood of a pause, and expressed concern that inflation will remain stubbornly high.

(Editing by Tomasz Janowski)