TREASURIES-US long bonds slip as Trump pick for Fed chair drives steeper curve

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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 says

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US producer prices rise in December, lift yields

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US rate futures price in two full cuts in 2026

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 30 (Reuters) - U.S. long-dated Treasury bond prices dipped 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. Bond yields, which move inversely to prices, pared their increase in the afternoon session as volume thinned ahead of the weekend. 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 a 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 the dual mandate, and trying to figure out what ?to do with short-term ?rates," Barnes noted. Some analysts also said Warsh's past hawkish positions have somewhat offset concerns that he might defer to what Trump wants the central bank to do. U.S. 30-year Treasury yields earlier jumped by as much as 6 basis points (bps) to a session high of 4.914%. They last traded at ?4.872%, 1.7 bps higher, on pace for its largest weekly rise since late December. On the month, it was up 4 bps, its third straight monthly increase. Benchmark 10-year yields were up 1.2 bps at 4.239%, heading for a 9-bp rise in January. The yield curve steepened following Warsh's nomination. The spread between two-year and 10-year yields steepened to as much as 71.50 bps, the steepest in more than a week. The curve was last 71.3 bps compared with 66.8 bps late on Thursday. It has steepened nearly 4 bps for the month of January, posting its widest weekly spread since late December.

Investors have also pointed to concerns about Fed independence, noting that Warsh ?is a Trump ?nominee and that the U.S. president has repeatedly criticized Fed Chair Jerome Powell for the pace of interest-rate cuts.

"We remind investors that one vote will not be enough to change the course of monetary policy," said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.

"Given that the 12-member ?Open Market Committee's most recent policy rate decision had just two policymakers voting for a cut, Warsh would require significant sway to bring other voting members in line in order to muster a majority required to push through additional rate cuts in the future." U.S. two-year yields were down 2.5 bps at 3.527%. The yield posted its largest weekly drop since mid-November, but showed the biggest monthly increase since July 2025.

Treasury yields subsequently moved higher after data showed U.S. producer prices grew more than expected in December, suggesting businesses were passing on higher costs tied to 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.