TREASURIES-US government debt rises after 2-year note auction; Fed chair pick in focus

(Adds results of 2-year old notes auction, quotes, updates rates)

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Auction of 2-year notes shows solid results

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US market reacts to sharp rise in French, German bonds

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Rieder and Warsh seen as most likely Fed chair picks

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FOMC expected to keep rates unchanged this week

By Tatiana Bautzer

NEW YORK, Jan 26 (Reuters) - U.S. Treasuries rose on Monday, pushing yields lower, after strong demand for an auction of two-year notes reflected a still healthy ?appetite for dollar-denominated assets despite persistent fiscal strains and rising global tensions over trade and national security.

Treasury yields were already lower before the auction, in line with European global ?bond markets, particularly France and Germany. They further extended their fall following the auction. Bond yields move inversely to prices.

The ?benchmark U.S. 10-year Treasury note fell 2.8 basis points (bps) to 4.211% while the yield on ?two-year Treasuries dipped 1.3 bps to ?3.592%.

The two-year note auction was priced at 3.580%, lower than the expected rate at the bid deadline, indicating investor demand robust enough to accept a figure lower ?than what the market had anticipated.

The bid-to-cover ratio, another gauge of ?investor appetite, was 2.75, higher than the average of 2.61.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator ?of economic expectations, was at a positive 62.3 basis points. Monday's data, ?meanwhile, was ?positive. 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.

The market, however, showed little reaction to the report with the Federal Reserve's ?Federal Open Market Committee widely expected to hold rates steady at its meeting this week in the 3.50% to 3.75% target range.

An auction of $70 billion in 5-year notes on Tuesday will also be closely watched.

"We don't expect any big development coming from this week's Fed meeting, with rates steady and no big shifts," said Tom di Galoma, managing director at Mischler Financial Group in Park City, Utah. CME's FedWatch tool estimates more than a 97% chance of steady rates in the January meeting, with futures ?markets projecting ?a higher chance of another cut only in June.

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 with the largest influence on Treasury 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 call between Trump and Minnesota governor Tim Walz about immigration enforcement operations ?after a second fatal shooting by federal agents in Minneapolis also seemed to ease the risk of a potential partial U.S. government shutdown ahead of a January 30 funding deadline.

Gold hit record above $5,100 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. (Reporting by Tatiana Bautzer; Editing by Alex Richardson and Gertrude Chavez-Dreyfuss)