July 23, 2018 / 1:30 PM / a year ago

TREASURIES-Yields rise, Fed seen continuing rate hikes despite Trump criticism

* Yield curve steepens as Trump criticizes Fed rate hikes

* Bank of Japan seen reducing accommodation

* Treasury to sell $101 bln coupon-bearing supply this week

By Karen Brettell

NEW YORK, July 23 (Reuters) - Benchmark 10-year Treasury yields rose to their highest levels in a month on Monday as the Federal Reserve was seen as likely to continue raising interest rates despite criticism from U.S. President Donald Trump.

Long-dated yields rose and the yield curve reached its steepest level in three weeks on Friday after a White House official told CNBC that Trump is concerned the U.S. central bank will raise interest rates another two times this year.

Trump had earlier questioned the Fed’s expected pace of hikes in posts on Twitter, saying it takes away from the United States’ “big competitive edge” and could hurt the U.S. economy. Trump also criticized Fed policy in an interview on CNBC on Thursday.

Trump’s comments are “something that we haven’t seen in a very long time,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

If the Fed is less likely to raise rates due to Trump’s influence it could bolster inflation, which would send longer-dated yields higher. Alternatively the Fed could be more compelled to continue rate hikes to show its independence, a factor that would also weigh on bonds.

“Is this a situation where one would expect the Fed to give in to presidential pressure or would this simply embolden the Fed’s plans to move forward? I would say it’s probably the latter,” Lyngen said.

Long-dated bond yields also rose on indications that the Bank of Japan may scale back its monetary stimulus faster than expected.

Reuters reported on Friday that the Japanese central bank was discussing modifying its easing program.

Benchmark 10-year notes fell 4/32 in price to yield 2.906 percent, the highest since June 22 and up from 2.893 percent on Friday. The yield curve between two-year and 10-year notes briefly rose above 30 basis points, its steepest level since July 5.

This week’s economic focus will be Friday’s gross domestic product reading for the second quarter, which will be evaluated for indications on how last year’s tax overhaul and recent trade tariffs are influencing growth.

The Treasury Department will sell $101 billion in coupon-bearing supply this week including $35 billion in two-year notes on Tuesday, $36 billion in five-year notes on Wednesday and $30 billion in seven-year notes on Thursday. )

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