TREASURIES-US Treasury yields rise as Warsh set to lead Fed

By Karen Brettell

NEW YORK, Feb 2 (Reuters) - U.S. Treasury yields rose on Monday as traders evaluated whether former Federal Reserve governor Kevin Warsh will bring a more dovish outlook to the U.S. central bank than he had previously.

U.S. President Donald Trump on Friday chose Warsh to head the Fed when Jerome Powell's leadership term ends in May. Warsh had a reputation as an inflation hawk in his earlier stint at the central bank, but now advocates for rates to be lowered.

"There is a lack of clarity about which Kevin Warsh actually shows up. Is it ...the hawk ... or is it ... the dove, who's a requirement for President Trump's nomination," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

"I think right now the market's kind of laying low and watching the fundamentals," Goldberg said.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 2.2 basis points to 3.549%. The yield on benchmark U.S. 10-year notes US10YT=RR rose 1.2 basis points to 4.253%.

The yield curve between two- and 10-year notes US2US10=TWEB flattened by around one basis point to 70 basis points, after reaching 72.7 basis points earlier on Monday, the steepest since April.

Traders are also focused on comments Warsh has made regarding reducing the size of the Fed balance sheet, which could tighten market liquidity.

"While he has adopted a dovish tone during the nomination process, we expect him to revert to his earlier instincts. Even when advocating for lower rates, Warsh has sought to compensate by tightening financial conditions through balance-sheet reduction," Felix Vezina-Poirier, chief strategist at BCA Research said in a report.

Goldberg noted that any balance sheet shifts will be longer-term and unlikely to have an immediate impact.

"Even Governor Miran mentioned last week that the way that we would get to a smaller balance sheet would be to ease some of the regulatory requirements that have created the need for the Fed to keep a large balance sheet," Goldberg said.

"All of that will just take lots and lots of time, so I don't think there's going to be a sudden swerve in the Fed balance sheet policy," he added.

Fed governor Stephen Miran, the most dovish Fed policymaker who has advocated for large interest rate cuts, said last week that regulations are a big issue for the size of the Fed’s balance sheet.

This week’s main economic focus will be Friday's jobs report for January, which is expected to show that employers added 65,000 jobs during the month, the median estimate of economists polled by Reuters showed.

The unemployment rate is expected to stay steady at 4.4%.