TREASURIES-Yields edge up as traders evaluate data, Warsh's Fed impact

By Karen Brettell

NEW YORK, Feb 4 (Reuters) - U.S. Treasury yields edged higher on Wednesday as traders waited on delayed U.S. economic data and continued to evaluate the impact that incoming U.S. Federal Reserve Chair Kevin Warsh is likely to have on monetary policy.

The government's closely watched jobs report for January has been pushed back from its scheduled release on Friday due to a four-day partial government shutdown that ended on Tuesday.

In the meantime, the ADP's national employment report on Wednesday showed that U.S. private payrolls increased less than expected in January amid job losses in the professional and business services as well as manufacturing sectors.

Robert Tipp, chief investment strategist at PGIM Fixed Income, said that the ADP data doesn't alter market expectations for two 25 basis point cuts this year, but noted "the risk for bonds is stronger U.S. economic growth".

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 0.2 basis points to 3.574%. The yield on benchmark U.S. 10-year notes US10YT=RR rose 0.7 basis points to 4.28%.

The yield curve between two- and 10-year notes US2US10=TWEB steepened by around one basis point to 70.6 basis points.

Fed funds futures traders are pricing in two 25 basis point cuts this year on concerns about a weakening jobs market and on expectations that Warsh will oversee a more dovish Fed when Jerome Powell's term as Chair ends in May.

However, stronger growth and any renewed uptick in inflation could complicate this outlook. Warsh has also argued for the Fed reducing the size of its balance sheet, which would tighten financial conditions, saying that large Fed holdings distort finances in the economy.

"The story has been, you will tighten by shrinking the balance sheet and you'll ease by cutting rates. And then there's a disagreement on the inflation picture… that AI is going to result in reduced inflation," Tipp said.

"That has created a lot of uncertainty. Markets by and large have dealt with it by hunkering down and not moving very much," he added.

Any shift to the Fed's balance sheet policy, meanwhile, would likely depend on changes to bank regulations and would be unlikely to occur in the short-term.

Other data on Wednesday showed that the U.S. services sector held steady in January, but businesses paid more for inputs, suggesting that services inflation could pick up after being on a slowing trend in recent months.

The Treasury Department also said on Wednesday it will keep the size of its nominal coupon auction sizes steady for the coming quarter and expects to keep them steady for at least the next several quarters, in line with analysts' expectations.