TREASURIES-Yields fall as markets consider weak jobs data, Fed concerns

By Tatiana Bautzer

NEW YORK, June 26 (Reuters) - Yields on 2-year Treasury notes eased on Thursday as markets considered weak jobs data and speculation about whether President Donald Trump could name early a replacement for Federal Reserve Chair Jerome Powell.

"You are starting to see some cracks in the labor market, and that may give some confidence to markets that the Fed can begin easing in September," said Stan Shipley, fixed income strategist at Evercore ISI in New York.

Concerns about a potential early nomination for Powell’s replacement pressured yields lower during Thursday's session, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. Investors fear a "shadow" Fed chair could influence monetary policy.

The Wall Street Journal reported that Trump is considering selecting Powell's replacement in the next few months ahead of the end of his term next May.

"Messaging from a dovish incoming Chair could potentially overshadow the hawkish skew to Powell’s wait-and-see signals," Lyngen said in a note sent to clients.

Christopher Waller and Michelle Bowman, both Trump appointees, said publicly they would be open to a potential interest rate cut as soon as July.

But Powell and other officials such as Richmond Fed President Thomas Barkin have said the best course of action is to wait as tariffs are very likely to push inflation up over the coming months.

Although markets have been increasing the odds of a rate cut in July, "we would need really awful job-market news for that to happen," Shipley added.

According to CME's FedWatch tool, there is a 26% chance of a first 25-basis-point rate cut happening next month. The tool shows a 92% chance of lower rates in September.

Other data released on Thursday also showed signs of a deceleration in the U.S. economy.

First-quarter GDP was also revised lower, although data going through March did not impact the Treasury market.

"The GDP data points to a consumer under pressure in the first quarter. This makes tomorrow's consumption release all the more relevant," said BMO's Lyngen, referring to the Personal Consumption Expenditures report, the Fed's preferred inflation gauge.

Durable goods orders rose more than expected in May, but the main factor was the surge in commercial aircraft bookings. Outside the transportation industry, orders were muted.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB fell 3 basis points to 4.263% in afternoon trading. The yield on the 30-year bond US30YT=TWEB was down 1.5 basis points, at 4.827%.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations,

fell 4.9 basis points to 3.73%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 53.1 basis points.

The Treasury had fair demand for its $44 billion auction of 7-year notes, with a 2.53 times bid to cover ratio, slightly down from the 2.64 average. Dealers took 11.6% of the auction, and the high yield was 4.022%. After the auction, 7-year yields retreated to 4%.