TREASURIES-US yields rise, set for weekly climb as investors gauge economy, rate path

By Chuck Mikolajczak

NEW YORK, Jan 16 (Reuters) - U.S. Treasury yields advanced on Friday and were poised for a weekly advance as investors weighed mixed economic data and unprecedented pressure from the White House to lower interest rates.

Yields have been choppy throughout the week, remaining in a tight range. Markets have grappled with a revelation by Federal Reserve Chair Jerome Powell that the Trump administration had threatened him with criminal indictments over cost overruns on a building renovation project. The Trump administration has said it has a duty to investigate potential wrongdoing. Markets are also watching rising tensions in the Middle East and U.S. economic data on the labor market and inflation.

In addition, several Fed officials this week expressed a need for the central bank to remain cautious in cutting interest rates.

"The bond market's still relatively unclear as to where things go next, there's lots of uncertainty really in both directions, both towards higher and lower yields," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

"The driving force is still very much what happens to the Fed and what happens to the economy going forward, and on that, there's just an extreme lack of clarity from investors, so that's why we've been stuck in that very, very tight range in rates."

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB jumped 6.9 basis points to 4.229% after climbing to 4.231%, its highest since September 3. The yield was up 6 basis points for the week, its biggest weekly jump since early December.

The yield on the 30-year bond US30YT=TWEB rose 5.2 basis points to 4.838% and was up 2 basis points on the week.

Yields moved higher after President Donald Trump on Friday praised economic adviser Kevin Hassett at a White House event and said he may want to keep him in his current role, denting market expectations he would succeed Powell.

Federal Reserve Vice Chair for Supervision Michelle Bowman said the Fed should be ready to quickly cut rates again if needed due to a fragile job market that could quickly soften further. Federal Reserve Vice Chair Philip Jefferson is scheduled to speak later on Friday.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, rose 3.5 basis points to 3.599% after hitting a five-week high of 3.613% and is set for a second straight weekly gain.

Markets are currently pricing in a 5% chance for a rate cut at the Fed's meeting later this month, while markets have trimmed expectations for a March cut of at least 25 basis points to 19.6% from 28.7% a week ago, according to CME's FedWatch Tool.

Economic data on Friday showed manufacturing output rose 0.2% last month after an upwardly revised 0.3% gain in November, the Federal Reserve said, topping the estimate of economists polled by Reuters calling for a decline of 0.2%.

A separate report showed the National Association of Home Builders/Wells Fargo Housing Market index dropped 2 points to 37 in January. The index has remained below the 50 break-even point for 21 straight months as affordability concerns stymied potential buyers and rising costs dented construction activity.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, seen as an indicator of economic expectations, was at a positive 62.8 basis points.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.402%, its highest since November 3, after closing at 2.368% on Thursday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.323%, indicating the market sees inflation averaging about 2.3% a year for the next decade.