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

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Warsh's past hawkish stance contrasts with current dovish tone

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Market uncertain about Warsh impact on Fed balance sheet policy

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Jobs report for January delayed due to partial government shutdown

(Updated in New York afternoon time)

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 yield, which typically moves ?in step with Fed interest rate expectations, rose 3.8 basis points to 3.565%. ?The yield on benchmark U.S. 10-year notes rose 3.2 basis points to 4.273%.

The yield curve between two- and 10-year notes 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.

Atlanta Fed Chair Raphael Bostic said on Monday that Warsh faces a "tall task" in leading the U.S. central bank, particularly if he aims to convince the members of the policy-setting committee to go along with him on monetary policy decisions.

Data on Monday showed that U.S. factory activity grew for the first time in a year in January, with new orders

rebounding sharply

.

Meanwhile the U.S. Bureau of Labor Statistics said on Monday the closely watched employment report for January will not be released on Friday because ?of a partial shutdown of the federal government.

The U.S. House of Representatives takes up legislation on Monday that would lift a partial government shutdown that started over the weekend, with a

final vote expected on Tuesday

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The Treasury Department said on Monday it expects to borrow $574 billion in the first quarter, $3 billion lower than it had anticipated ?in November. It will provide details of its refunding plans on Wednesday morning.

(Reporting by Karen Brettell; Editing by Alexander Smith and Diane Craft)