TREASURIES-Treasury yields climb on Fed policy speculation under Warsh

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Warsh's Fed leadership may lead to balance sheet reduction

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Economic data delayed due to partial government shutdown

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Rising productivity aids Fed's inflation battle, says Barkin

By Karen Brettell

NEW YORK, Feb 3 (Reuters) - U.S. Treasury yields rose on Tuesday as traders evaluated possible shifts in Federal Reserve policy under Kevin Warsh and as traders faced U.S. economic data delays due to a partial government shutdown. 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.

Jason Pride, chief of investment strategy ?and research at Glenmede, sees the Fed likely to cut rates by 25 ?basis points two times this year, ?which is already largely being reflected in market pricing. The yield curve, meanwhile, is likely steepening on the view that Warsh may seek to reduce ?the size of the Fed's balance sheet. Warsh has argued that ?large Fed holdings distort finances in the economy. In a Wall Street Journal opinion story from November, he wrote "the Fed's bloated balance sheet, designed to support the biggest firms in a bygone ?crisis era, can be reduced significantly."

He has been "a strong advocate ?against the ?overuse of the Federal Reserve's balance sheet," Pride said. Meanwhile, "his perspective on the front end is very much in line with the Federal Reserve's policy up until now, and maybe even a little bit dovish relative ?to it."

The 2-year note yield, which typically moves in step with Fed rate expectations, rose 0.8 basis points to 3.578%. The yield on benchmark U.S. 10-year notes rose 0.7 basis points to 4.284%.

The yield curve between two-year and 10-year notes was roughly flat at around 70 basis points after reaching 72.7 basis points on Monday, the steepest since April.

Improving economic data has pushed back expectations on when the Fed will next cut rates to June, although ?a sharp ?slowdown in the labor market could bring rate cut bets forward again.

The government's closely watched employment report for January has been delayed due to the partial government shutdown. It had been scheduled for Friday. The ?Republican-controlled U.S. House of Representatives will try to pass a deal that would end the shutdown on Tuesday over opposition from an unusual alignment of Democrats and conservatives.

Pride sees the U.S. economy as likely to post above-average growth in 2026 as the headwinds from tariff policies are reduced, while fiscal stimulus boosts growth. That could increase the risk of inflation picking up, which is likely to remain a focus for Fed officials, he said. Rising productivity is helping businesses ease cost pressures, an aid in the U.S. Federal ?Reserve's inflation fight, but it is difficult to predict if that will persist and therefore hard to know how monetary policy might need to respond, Richmond Fed President Tom Barkin said on Tuesday. Fed Governor Stephen Miran, meanwhile, continued to make the case for aggressive central bank interest rate ?cuts this year, in an interview on Fox Business Network on Tuesday.

(Reporting by Karen Brettell; Editing by Andrea Ricci )