TREASURIES-Yields fall as markets consider weak jobs data, interest rate cuts timing

By Tatiana Bautzer

NEW YORK, June 26 (Reuters) - Yields on U.S. Treasuries eased on Thursday as markets considered weak jobs data and reports that President Donald Trump could name a replacement for Fed Chair Jerome Powell soon, which fueled speculation of faster interest rate cuts.

"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.

The possibility Trump could nominate Powell’s replacement before his term as Federal Reserve chair ends in May 2026 pressured yields during Thursday's session, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. Investors believe 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.

"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.

Fed Governors Christopher Waller and Michelle Bowman, both Trump appointees, said recently that 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 is to wait as tariffs are very likely to push inflation up over the coming months.

Markets have been slowly increasing the odds of a rate cut decision at July's meeting, according to the CME's FedWatch tool. On Thursday, this chance was at 22%. Investors predict a 95% chance of lower rates in September.

But for a rate cut to materialize in July, "we would need really awful job-market news for that to happen," Shipley added.

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

First-quarter GDP was revised lower, although the data did not impact the Treasury market. Investors will be attentive to Personal Consumption Expenditures price index data for May on Friday.

STEEPER CURVE

The closely watched yield curve between two- and 10-year U.S. Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at 53.1 basis points, the most positive level in more than a month.

The steepening of the yield curve, as the widening is known, happened mainly because yields fell faster for shorter-term securities than at the longer end. Investors on the longer end are seeking higher yields to deal with uncertainties such as fiscal sustainability and longer term inflationary pressure.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB also fell 4.3 basis points to 4.25%. The yield on the 30-year bond US30YT=TWEB fell 3.1 basis points to 4.811%.