TREASURIES-US long bonds fall as Trump nominates Warsh as next Fed chair

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US yield curve steepens with Warsh nomination

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Balance sheet may not be primary focus for Warsh -analyst

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US producer prices rise in December, lifts yields

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US rate futures price in two cuts in 2026

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By Tom Westbrook, Amanda Cooper and Gertrude Chavez-Dreyfuss

SINGAPORE/LONDON/NEW YORK, Jan 30 (Reuters) - U.S. long-dated Treasury bond prices fell on Friday after President Donald Trump said he would nominate former Federal Reserve Governor Kevin Warsh to head the U.S. ?central bank, a choice seen as bearish for bonds given his preference for a smaller Fed balance sheet.

Warsh's nomination prompted investors to reassess the outlook for policy support in the Treasury market, pressuring longer-dated ?yields higher. He has called for regime change at the Fed, seeking among other things less quantitative easing, meaning he could push to ?reduce the amount of bonds it owns.

"If the smaller balance sheet becomes a primary focus, ?then keeping all things equal, that would ?put upward pressure on your longer-term bond yields just because you would have that extra supply out there in the Treasury market," said Jim Barnes, director of fixed income at Bryn ?Mawr Trust in Berwyn, Pennsylvania.

But Barnes said a smaller balance sheet may not ?be realistic goal.

"If you think about somebody that might come in there and shrink the size of the balance sheet, I just don't think that's going to be the focus coming out of the gate. There's going to be ?other things that's going to be reviewed, most notably the inflation side ?and the labor ?market side of dual mandate, and trying to figure out what to do with short-term rates."

Warsh's past hawkish positions have offset concerns that he might defer to what Trump wants the central bank to do.

U.S. 30 Treasury yields earlier jumped ?by as much as 6 basis points to a session high of 4.914%. They last traded at 4.878%, 2.4 bps higher. Bond prices move inversely to prices.

Benchmark 10-year yields were up 1.8 bps at 4.245%, heading for a 10-bp rise in January, as prices have fallen.

The yield curve steepened following Warsh's nomination. The spread between two-year and 10-year yields steepened to as much as 71 bps, the steepest in more than a week. The curve was last 70.2 bps compared with 66.8 bps late on Thursday.

The long end is particularly susceptible to a smaller Fed balance sheet, ?because it ?implies the central bank may be a less reliable backstop in the money markets.

That is where hedge funds borrow to pay for "basis trades" that arbitrage small differences between cash and Treasury derivatives and have driven leveraged investment into long-dated paper, Damien Boey, portfolio ?strategist at Wilson Asset Management in Sydney, said.

"If you now change the assumption of protected money markets because the Fed is no longer on call ... then obviously that trade starts to look less appealing and more risky," he said.

U.S. two-year yields were down 1 bp at 3.54%.

Treasury yields rose after data showed U.S. producer prices increased more than expected in December, with businesses appearing to pass on higher costs from import tariffs.

The Producer Price Index for final demand surged 0.5% last month after an unrevised 0.2% gain in November, according to data from the Labor Department's Bureau of Labor Statistics.

Economists polled by Reuters had forecast ?it climbing 0.2%.

In the 12 months through December, the PPI increased 3.0% after rising by the same margin in November.

U.S. rate futures on Friday have priced in about 51 bps of easing this year or roughly two rate cuts of 25 bps each. That was 44 bps after the Fed decision last week to hold interest rates steady.