TREASURIES-U.S. yields slightly lower as markets assess Fed chair pick risk, investor demand

By Tatiana Bautzer

NEW YORK, Jan 26 (Reuters) - The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was slightly lower on Monday, as markets assessed known and new risks ahead of a very busy week.

The yield on the 10-year note fell 2.4 basis points to 4.215%. The 2-year US2YT=TWEB U.S. Treasury yield fell 0.7 basis points to 3.598%, ahead of a $69 billion auction of these notes later on Monday.

New orders for key U.S.-manufactured capital goods beat expectations in November, suggesting business spending on equipment maintained a steady growth pace in the fourth quarter. But the data did not change markets' perception, as the Federal Reserve's FOMC is widely expected to hold rates steady in its meeting this week in the 3.50% to 3.75% target range.

POTENTIAL ANNOUNCEMENT ON FED CHAIR

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York, sees the potential announcement of President Donald Trump's pick for the Federal Reserve chair as the event that may have the largest influence on markets this week.

Blackrock's Rick Rieder seems to be the top contender for the job, as well as former Fed governor Kevin Warsh, according to Polymarket odds.

"Markets respect Rieder, he's seen as a good candidate for the job", Lyngen said, adding that investors would see Warsh or Rieder as good choices to keep the Federal Reserve independent. National Economic Council economist Kevin Hassett would be seen as a more political choice.

The weekend brought a new risk - the potential partial U.S. government shutdown ahead of a January 30 funding deadline, as a second fatal shooting by federal agents in Minneapolis sharpened scrutiny of Trump's immigration crackdown.

Senate Minority Leader Chuck Schumer said his party would oppose legislation that included funding for the Department of Homeland Security.

If market expectations are confirmed, this week's FOMC decision will be the first time interest rates have not been cut since July. Stabilization in jobs growth and the drop in the unemployment rate may be given by the committee as reasons to keep rates unchanged.

Performance in the auctions will also be important this week to gauge demand for Treasuries, as worries about investors moving away from U.S. assets due to Trump's push to acquire Greenland and perceived threats to the Fed's independence linger.

Gold charged past $5,000 an ounce for the first time on Monday as an array of geopolitical tensions pounded the dollar, while investors remained on tenterhooks about possible official buying of the yen after a series of surges in the Japanese currency.