Bond market woes likely a factor for Fed, but intervention seen as unlikely

Sept 16 (Reuters) - Surging government bond yields are raising credit costs across the U.S. economy and could factor into Federal Reserve monetary policy deliberations, but analysts see the central bank resisting any explicit call from the Trump administration to bail out the market.

The focus on the Fed's possible involvement comes as Treasury Secretary Scott Bessent has taken an ‌unusually activist role in trying to tamp down rising yields he considers to be misaligned with the U.S. economic outlook.

Bessent's campaign, which saw the expansion of a key debt buyback operation last week, ‌is foundering, as the 10-year Treasury note rose above 5% to its highest since 2007. He shrugged the move off as owing to "global issues" on Tuesday as he arrived for a congressional hearing.

Treasury's bond market travails are raising questions whether the Fed might be requested ​to buy government debt to reduce supply, which could cap or lower yields, in turn easing government and private sector borrowing costs.

Fed watchers see little prospect for that outside of markets tumbling into distress, though there's little evidence of that so far even with the steady slide in prices. That said, the question has persisted given comments by Fed Chairman Kevin Warsh that have signaled a greater willingness to coordinate with Treasury on some issues.

"One of the Fed's unwritten mandates is financial conditions," said Rick Rieder, BlackRock Inc's chief bond investment manager, who was under consideration by Trump to be Fed leader. Noting that Fed policymakers influence the cost of debt through their adjustments to short-term interest rates, he ‌said that "has to be part of the criteria they consider" in any monetary ⁠policy decisions.

The Fed on Wednesday is expected to wrap up its two-day meeting with policymakers raising their policy rate by a quarter percentage point to 3.75% to 4.00% because recent inflation readings have been too high. Market participants believe this could help Treasury's cause because it will bolster the Fed's inflation-fighting credibility, which should help longer-dated yields ⁠come down over time.

A Deutsche Bank poll of investors released Monday found that investors see a rate hike now as likely lifting yields slightly over the short term, but they see long-term yields going up even more if the Fed were to leave rates steady.

If the Treasury encounters significant headwinds selling its debt or there were other market dislocations, the Fed could be drawn in more to buy debt to calm conditions, Rieder said. That makes it important to watch how coming debt ​auctions ​perform.