TREASURIES-Bond yields climb after Trump admin raises pressure on Powell

By Chuck Mikolajczak

NEW YORK, Jan 12 (Reuters) - U.S. Treasury yields were higher on Monday, after Federal Reserve Chair Jerome Powell revealed the central bank had been threatened with a criminal indictment over a building renovation project, rekindling concerns about the Fed's independence and the credibility of U.S. assets.

Powell said late Sunday the Fed had received subpoenas from the Justice Department last week pertaining to remarks he made to Congress last summer over cost overruns for a $2.5 billion building renovation project at the Fed's headquarters complex in Washington.

The move was the latest in a series of actions by U.S. President Donald Trump aimed at pressuring Powell, who is scheduled to step down from his post in May, and the central bank into lowering interest rates. Many investors feel such pressure could undermine the Fed's independence, seen as a cornerstone of the U.S. financial system and economic policy foundation.

"Anytime you have a new angle on something, the market reads it, trades on it a little bit, it has to digest it, and then it realizes this is just new news that's consistent with prior events that have come out," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"It feels as if the Fed is a tough institution to break, and so this is going to keep going on, though it's not going to go away, the persistencies will probably be there and the market is just going to have to take it in stride."

The yield on benchmark U.S. 10-year notes US10YT=RR rose 1.8 basis points to 4.189% after climbing to 4.207% on the session.

The 30-year bond US30YT=RR yield rose 2.8 basis points to 4.8467% after declining 4.5 basis points last week, its biggest drop since October.

Barnes said yields have been trading in a somewhat tight range over the past four months, holding near the top end of that range as economic data has indicated the Fed does not need to rush into additional rate cuts, which has exerted some upward pressure recently.

Employment data on Friday showed the U.S. economy created fewer jobs than expected in December, but was not weak enough to alter market expectations for just two rate cuts from the Fed this year.

Markets are awaiting inflation readings in the form of the consumer price index (CPI) and producer price index (PPI) this week to gauge the potential path of interest rates from the Fed. Those expectations showed little reaction to the subpoenas, with CME's FedWatch Tool showing a 26.1% chance of a March rate cut, down from 27.6% in the prior session.

The two-year note US2YT=RR yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 0.5 basis point to 3.545%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 64 basis points.

More supply will come to the market on Monday when the Treasury will auction $58 billion in three-year notes US3YT=RR and $39 billion in 10-year notes. An additional $22 billion in 30-year bonds will be auctioned on Tuesday.

Trump's actions come roughly two weeks before his effort to fire Fed Governor Lisa Cook will be argued before the Supreme Court. Market participants are also awaiting the Court's decision on the legality of Trump's sweeping tariff announcements, which could come this week.

Several Fed officials are due to speak on Monday, including Bank of Atlanta President Raphael Bostic, Bank of Richmond President Tom Barkin and Bank of New York President John Williams.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.362% after closing at 2.335% on January 9, its highest in a month.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.298%, indicating the market sees inflation averaging about 2.3% a year for the next decade.