Euro zone yields edge up after central banks' support to Powell

(Updates prices and headline)

By Joice Alves

LONDON, Jan 13 (Reuters) - Euro zone bond yields edged up on Tuesday, after 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 1 basis point at 2.81%, after a 2.5 bps ?decline a day earlier.

The 10-year U.S. Treasury yield was down 1.8 ?bps to 4.16% after the ?U.S. inflation data cemented expectations that the Fed would leave interest rates unchanged this month.

DUTCH PENSION FUND HEDGING

"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 had 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.

ISSUANCE BY EUROPEAN COUNTRIES

German 2-year yields were flat at 2.10%.

French and Italian 10-year yields also rose around 2 bps on Tuesday to 3.51% 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.

(Reporting ?by Joice Alves and Alun John; Editing by Thomas Derpinghaus, Gareth Jones and Alison Williams)