TREASURIES-US two-year yields off lows after Trump says he is not firing Fed's Powell

By Gertrude Chavez-Dreyfuss

NEW YORK, July 16 (Reuters) - Two-year U.S. Treasury yields tumbled in volatile trading on Wednesday but came off their lowest levels after President Donald Trump said he was not planning to fire Federal Reserve Chair Jerome Powell, refuting media reports that he planned to do so soon.

Two-year yields US2YT=RR, which track interest rate expectations, fell to a roughly one-week low of 3.86% after CBS and Bloomberg reported that Trump had indicated to a group of House Republicans that he would fire Powell.

The yield was last 5.1 basis points lower at 3.906% US2YT=RR.

The reports pushed rate cut bets starting in September to 66%, from 54% just before. After Trump said the reports were not true, that probability stood at 60%.

"I don't rule out anything, but I think it's highly unlikely unless (Powell) has to leave for fraud," Trump said, a reference to recent White House and Republican lawmaker criticism of cost overruns in the $2.5 billion renovation of the Fed's historic headquarters in Washington.

Investors sold off the long end of the Treasury curve, pushing 30-year yields to an eight-week high of 5.08%, before they eased back to 5.041% US30YT=RR.

The benchmark 10-year yield US10YT=RR also rose but was last down 1.2 bps on the day at 4.477%.

The yield curve steepened to its most since April, with the spread between two- and 10-year yields widening to as much as 61.8 bps. That reflects the sell-off at the long end amid fiscal worries and concerns about inflation going out of control if the Fed under a new chair cuts rates aggressively.

"This story keeps churning so understandably markets are nervous that it could happen sooner rather than later re Trump firing Powell," said Kenneth Broux, head of corporate research and rates, at Societe Generale in London.

"Bond and FX markets do not like the uncertainty. We've had stronger U.S. CPI goods ex-autos just yesterday, so to think that lower rates are the way forward as tariffs seep through consumer prices is not going to reassure."