Euro zone yields edge higher with Trump's attacks on Fed chief in focus

(Updates throughout)

By Joice Alves

LONDON, Jan 13 (Reuters) - Euro zone government bond yields edged higher on Tuesday, reversing Monday's drop, as central bank chiefs lined up in support of Federal Reserve Chair Jerome Powell after the Trump administration threatened him with a criminal prosecution.

Easing some concerns around the Fed's independence, the Trump ?administration's move was also criticised by key members of the president's Republican Party.

Germany's 10-year yield, the benchmark for ?the euro zone, was last up 2.1 basis points at 2.82%, reversing a similar-sized decline ?a day earlier.

The 10-year U.S. Treasury yield was down 0.4 ?bps to 4.18% after ?the U.S. inflation data.

"The ongoing spat between (President Donald) Trump and Powell would damage the credibility of U.S. institutions," said Mohit ?Kumar, economist at Jefferies.

"Already the diversification away ?from U.S. assets has been a theme gaining ground in 2025, and recent developments would intensify it further," he said, adding that the best ?way to play the loss of confidence ?theme would ?be steeper curves.

But European curves flattened on Monday as the second-largest Dutch pension fund, PFZW, indicated that it has higher than expected hedging needs.

Yield curves flatten ?when the gap between longer and shorter-dated yields narrows.

"The (Dutch) reforms have been so well telegraphed that it was a case of buy the rumour and sell the fact. European curves have flattened since start of the year as the trade was fully in the price and European yields had started to look attractive," Kumar said.

The Dutch occupational pension ?system, ?the European Union's largest, is transitioning to a new system that investors had thought would add to pressure on long-term government bonds.

But ING analysts said announcements ?such as PFZW's could challenge speculative positions built up around those assumptions and cause curves to flatten, at least in the near term.

German 2-year yields were flat at 2.10%.

French and Italian 10-year yields also rose around 2 bps on Tuesday to 3.52% and 3.44%, respectively.

There has also been substantial issuance by European countries on Tuesday, including Belgium and Spain.

Euro zone yields were little affected ?by U.S. inflation data.

U.S. consumer prices

increased in December as the distortions related to a U.S. government shutdown that had artificially lowered inflation in November unwound.

The latest data cemented expectations that the Fed would leave interest rates unchanged ?this month. (Reporting by Joice Alves and Alun John; Editing by Thomas Derpinghaus and Gareth Jones)