TREASURIES-Long-dated yields rise as Trump ramps up attacks on Powell

By Davide Barbuscia and Tatiana Bautzer

NEW YORK, April 21 (Reuters) - Longer-dated U.S. Treasury yields rose on Monday as investors watched with concern the escalating Trump administration attacks on Federal Reserve chairman Jerome Powell, which could exacerbate weaknesses in markets caused by U.S. tariffs.

President Donald Trump on Monday pressured the U.S. central bank publicly on social media, asking for interest rate cuts. "Preemptive interest rate cuts have been called for by many," he wrote in a post on Truth Social. Citing lower energy prices, Trump said the economy could decelerate unless "mr. Too Late, a major loser, cuts interest rates NOW."

That came after Trump last week ramped up a long-simmering feud with the Fed chair, accusing Powell of "playing politics" by not cutting interest rates and asserting he had the power to quickly evict Powell from his job. White House economic adviser Kevin Hassett on Friday also said Trump and his team were continuing to study whether they could fire Powell.

Investors said pressure on the U.S. central bank heightened concerns over volatile policymaking that have rattled stock and bond markets over the past few weeks, as Trump's back and forth announcements of tariffs on imports increased the probability of an imminent economic slowdown or even a recession.

"Markets are just very headline sensitive right now, and there's certainly not a lack of headlines, particularly some jawboning out of the Oval Office on what the Fed should be doing versus what they are doing," said Michael Reynolds, vice president of investment strategy at Glenmede.

"This is just a reminder to markets that opinions can change on a whim out of this Oval Office ... we're not thinking really that there's this big direct impact on Fed independence right now, but it's indicative of how government policy is being enacted," he added.

An aggressive U.S. tariff policy will trigger a significant slowdown in the U.S. economy this year and next, with the median probability of recession in the next 12 months approaching 50%, according to economists polled by Reuters.

"Trump's comments on Powell are keeping the pressure on U.S. assets, including stocks and the long Treasuries," said Vail Hartman, U.S. rates strategist at BMO Capital Markets. "The reaction may have been exacerbated by low liquidity with some markets closed overnight, but surely the debate on whether to fire or not the Fed chairman does not help", he added.

Uncertainty around U.S. policymaking in recent weeks has also contributed to pushing higher the Treasury term premium, a measure of the compensation investors demand for the risk of holding long-dated rather than short-dated government debt.

A gauge of the 10-year Treasury term premium published by the Federal Reserve Bank of New York showed it stood at about 67 basis points as of Friday - the latest data available. That was more double the 10-year term premium on April 2, when Trump announced extensive tariffs on U.S. trade partners.

"We think the term premium is probably the bigger thing (moving yields higher) and that's sort of where you get uncertainty show up," said Reynolds at Glenmede.

STEEPENING CURVE

Market inflation expectations, measured by subtracting the yield of 10-year Treasury Inflation Protected Securities from the yield of 10-year Treasuries, remained relatively stable on Monday at 2.225% - just slightly higher than late last week.

Benchmark 10-year yields US10YT=RR were last at 4.403%, over seven basis points higher on the day. Two-year yields US2YT=RR, which more closely reflect expectations of changes in monetary policy, declined about five basis points to 3.747%.

Rates futures traders on Monday assigned a 63% probability of a 25 basis point rate cut by the Fed in June, a slightly higher chance than late last week, CME Group data showed.

The yield curve comparing two- and 10-year yields, closely watched by investors as it reveals market expectations on growth and inflation, steepened on Monday to about 65 basis points - the steepest it has been in over three years. A steepening 2/10 yield curve generally signals expectations of stronger economic activity, higher inflation, and higher interest rates over the long term.

Bond investors this week will have to absorb over $180 billion in Treasury debt issues split between two, five, and seven-year notes. Given the continued volatility in markets, the auctions will likely be watched closely as a test of investor appetite for U.S. government debt.