TREASURIES-US yields dip as investors look to payrolls data after Fed meeting

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Investors await payrolls data next week for signals on economy

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Fed chief upbeat about economy, but hints at medium-term cuts

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Yield curve steepens on inflation worries

By Tatiana Bautzer

NEW YORK, Jan 29 (Reuters) -

U.S. Treasury yields slipped on Thursday as investors settled into a wait-and-see stance ahead of a monthly employment report next week that is expected to offer clearer signals on labor market momentum and the ?likely pace of interest rate cuts in 2026.

Market participants also expect an agreement to negotiate new restrictions on U.S. federal immigration agents, potentially averting a ?government shutdown over the weekend.

In late morning trading, the two-year U.S. Treasury yield, which typically moves in ?step with interest rate expectations, was down 2.8 basis points (bps) to 3.553%.

While the ?Federal Reserve's decision on Wednesday ?to hold rates unchanged had muted impact on the Treasuries market overall, U.S. central bank chief Jerome Powell expressed an upbeat view of economic ?conditions in the near term and also left the door ?open for further rate cuts during the year depending on incoming data.

Investors are also banking on a potential deal in the U.S. Senate that would carve out legislation funding the ?Department of Homeland Security from a package of spending ?measures required to fund ?the military, health programs and other federal agencies, including the Department of Labor and the Bureau of Labor Statistics, through the rest of the fiscal year.

This outcome would mean that the BLS ?would be able to release the payrolls report for January next Friday. The BLS is also expected to release revisions to previous payrolls data.

The benchmark 10-year Treasury yield was up 1.2 bps at 4.239%, while 30-year Treasury bond yields were flat at 4.867%.

STEEPENING YIELD CURVE The yield curve steepened for a third straight session, with the gap between two- and 10-year Treasury notes, widening to a positive 68.4 bps, compared with 67 bps late ?on Wednesday.

Analysts ?said the dollar's slide to multi-year lows this week, along with a sharp rise in commodity prices, has helped steepen the curve. They added that these factors could continue to support further steepening ?in the coming months.

"We expect the gap between the two and the 10-year yields to hover between 60 and 70 points in the near term, but the curve can further steepen later in the year", said Vail Hartman, U.S. rates strategist at BMO Capital Markets. Speculation on a potential U.S. military attack on Iran pushed oil prices to their highest levels in six months, and the price of copper reached a record high on Thursday.

Markets also are keeping an eye on ?the announcement of a nominee to replace Powell as Fed chief when his term ends in May.

The U.S. Treasury on Thursday will auction $44 billion in seven-year notes, another litmus test of investor demand for dollar-denominated assets. In a report sent to clients, BMO Capital Markets analysts said ?the auction may lead to the highest yield since July. (Reporting by Tatiana Bautzer; Editing by Gertrude Chavez-Dreyfuss and Paul Simao)