TREASURIES-Yield curve steepens as Trump attempts to fire Fed's Cook

By Karen Brettell

NEW YORK, Aug 26 (Reuters) - The U.S. Treasury yield curve steepened on Tuesday as U.S. President Donald Trump’s attempt to fire Federal Reserve Governor Lisa Cook raised concerns about Fed independence and the prospect of a potentially more dovish composition of policymakers at the U.S. central bank.

Trump on Monday fired Cook over claims of mortgage borrowing impropriety. Cook responded that Trump has no authority to fire her from the central bank, and she will not resign.

The yield curve steepened on the news, with longer-dated yields rising while shorter-dated ones fell.

“It doesn't necessarily mean that you're going to have lower borrowing costs in the real economy,” said Zachary Griffiths, head of investment-grade and macro strategy at CreditSights in Charlotte, North Carolina. “We have several instances and examples of what could be extrapolated to be a longer-run trend of a steeper curve across Treasuries if Fed independence is in fact impacted.”

A politically influenced Fed that keeps rates lower than they otherwise might could increase concerns over rising inflation and reduce foreign demand for the debt on credibility fears.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, was last down 2.4 basis points on the day at 3.706%.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 1.2 basis points to 4.287%.

The yield curve between two-year and 10-year notes US2US10=TWEB was last at 58 basis points and earlier reached 59.8 basis points, the steepest level since July 16.

The move comes as traders ramp up bets that the Fed will cut rates at its September 16-17 meeting, following more dovish commentary from Fed Chair Jerome Powell on Friday than was expected.

Any potential cut may depend on jobs and inflation data for August that is due before the September meeting. However, Griffiths notes that the jobs market appears weaker than in September 2024, when the Fed cut rates by a larger than normal 50 basis points.

“When we think about the balance of risks and what we've learned about the labor market, I think the Fed can probably justify at least a couple of rate cuts from where we are today,” he said.

Trump has repeatedly criticized Powell for being too slow to cut rates and he is expected to replace Powell with a more dovish appointment when his term as Fed chair ends in May.

Powell could, however, stay on as a Fed governor, which would limit the number of appointments Trump can make to the central bank.

Meanwhile the Treasury Department will sell $69 billion in two-year notes on Tuesday, the first sale of $183 billion in short- and intermediate-dated supply this week.

It will also auction $70 billion in five-year notes on Wednesday and $44 billion in seven-year notes on Thursday.