TREASURIES-US yields dip as Trump's 'fraud' remarks fuel caution on auctions this week

Adds new analyst comment, NEW YORK dateline; updates prices

By Gertrude Chavez-Dreyfuss and Amanda Cooper

NEW YORK/LONDON, Feb 10 (Reuters) - U.S. Treasury yields drifted lower on Monday, as investors pondered remarks made over the weekend by President Donald Trump that his administration could look into Treasury debt payments for evidence of possible fraud.

Trump's comments came ahead of the $125 billion in U.S. three-year, 10-year and 30-year Treasury auctions this week, sparking worries about demand for government debt.

Trump, who spoke to reporters aboard Air Force One on Sunday, suggested that the $36 trillion U.S. debt load might not be that high.

"We're even looking at Treasuries," Trump said. "There could be a problem - you've been reading about that, with Treasuries and that could be an interesting problem."

Trump added: "It could be that a lot of those things don't count. In other words, that some of that stuff that we're finding is very fraudulent, therefore maybe we have less debt than we thought."

"People are still trying to decipher what Trump said yesterday (Sunday) about Treasuries and fraud. The problem with that is those remarks came ahead of the three-year, 10-year and 30-year auctions this week," said Stan Shipley, managing director and fixed-income strategist at Evercore ISI in New York.

"And demand could be tough ahead of these auctions," Shipley said. "If I'm an investor, do I really want to step forward here until I understand what's going on?"

In midmorning trading, the yield on the benchmark 10-year Treasury note US10YT=RR slipped 1.8 basis points (bps) on the day to 4.469%, while two-year yields US2YT=RR, which are typically tied to policy moves by the Federal Reserve, were down 2.1 bps at 4.258%.

U.S. 30-year were also slightly down on the day at 4.687% US30YT=RR.

It was not clear whether Trump was referring to debt service or other government payments made by the Treasury Department.

"What he may be referring to are things like Medicare, or education, or aid ... that may not have been exactly done right," Shipley said.

"And to pay for those 'frauds,' we issued Treasuries. Trump is probably wondering: Can I get out of honoring those Treasuries that paid for the fraud? But this is just my speculation."

Neither the White House nor the Treasury Department were immediately available for comment when contacted by Reuters.

"It is virtually impossible that President Trump's comments refer to the debt held by the public, including foreign holders. This is the reason the market is not reacting and any reaction would be based on misunderstanding or misinformation," said Maria Vassalou, head of the Pictet Research Institute.

Vassalou noted that around a fifth of gross U.S. federal debt is held in government accounts, mostly related to Social Security retirement funds and healthcare programs, and Trump's comments "most likely refer to that portion of U.S. debt."

With little in the way of clarity over what Trump may have meant, the focus in markets remained on the economy and what the Fed might do with interest rates in the coming months, after having left them unchanged at the January meeting.

Friday's U.S. nonfarm payrolls report showed an increase of 143,000 workers in January, compared with expectations for a rise of 170,000, while December's number was revised up to 307,000. The report added to expectations that the Fed will remain on hold for the foreseeable future.

U.S. rate futures priced in on Monday about 39 bps of easing or just one rate cut this year, with about a 54% chance of a second quarter-point reduction, according to LSEG estimates.

Tariffs, meanwhile, remained in focus with Trump announcing 25% duties on steel and aluminum imports into the United States, on top of existing levies on the products.

Investors are also looking to this week's events led by Fed Chair Jerome Powell's biannual monetary policy report to the Senate Budget Committee on Tuesday and the House of Representatives Financial Services Committee on Wednesday.

The data calendar includes reports crucial to monetary policy: consumer price index numbers on Wednesday and retail sales on Friday.