TREASURIES-Yields dip as Trump policies stay in focus

Updated in New York afternoon time

By Karen Brettell

NEW YORK, Jan 9 (Reuters) - Treasury yields eased on Thursday following a sharp selloff that sent 10-year yields to a more than eight-month high on Wednesday as traders evaluated the likely economic impact of policies proposed by the incoming administration of President-elect Donald Trump.

Business deregulation and tax cuts are likely to boost U.S. growth while a crackdown on illegal immigration and tariffs are seen as potentially fanning inflation. The Federal Reserve, meanwhile, is expected to be more cautious in cutting interest rates as it watches the economic impact of the changes.

With considerable uncertainty over what policies exactly Trump will introduce, traders are pricing in much stronger growth as the default option, said Thomas Simons, U.S. economist at Jefferies in New York.

"We can't predict how it's going to go wrong," he said. "So you're left with this only path forward that is - well, I guess it means we're going to have more growth, it means we're going to have more inflation, it means that the Fed is probably not going to cut as much."

The U.S. government is also expected to increase debt auction sizes this year if the budget deficit continues to worsen, as is widely expected for the foreseeable future, and as it balances its debt maturity profile to rely less on shorter-dated bills.

Fed Governor Michelle Bowman and Boston Fed President Susan Collins on Thursday both expressed taking a cautious approach to further rate cuts.

Kansas City Fed President Jeff Schmid also signaled a reluctance to cut interest rates again while Philadelphia Fed President Patrick Harker said he still expects the U.S. central bank to cut interest rates, but added that any sort of imminent move down isn't needed.

Thursday's pause in the bond selloff came before jobs data on Friday, which is expected to show that employers added 160,000 jobs during the month. USNFAR=ECI

Trading volumes were also light as the U.S. bond market closed early in honor of former President Jimmy Carter.

Interest rate-sensitive two-year note yields US2YT=RR fell 2.3 basis points on the day to 4.268%.

Benchmark 10-year yields US10YT=RR fell 0.2 basis points to 4.691%. They peaked at 4.73% on Wednesday, the highest since April 25.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened two basis points to 42.1 basis points, after reaching 42.9 basis points on Wednesday, the steepest since May 2022.

Thirty-year Treasury yields US30YT=RR were flat at 4.932%, after reaching 4.968% on Wednesday, the highest since November 2023.

(Reporting by Karen Brettell
Editing by Bernadette Baum and Deepa Babington)

((karen.brettell@thomsonreuters.com;))