TREASURIES-US yields dip as investors eye payrolls data

By Gertrude Chavez-Dreyfuss

NEW YORK, July 31 (Reuters) - U.S. Treasury yields slid on Thursday in choppy trading, after rising the previous session following less dovish comments from Federal Reserve Chair Jerome Powell, as investors balanced positions ahead of another important indicator - nonfarm payrolls for July - on Friday.

The week has been packed with economic data and events. Powell on Wednesday doused expectations of a rate cut at the next Fed meeting in September. In a press briefing after the Fed held rates steady, Powell said the Fed is focused on controlling inflation - not on government borrowing or home mortgage costs that President Donald Trump wants reduced. He added that the risk of rising price pressures from the administration's trade and other policies remains too high for the central bank to begin loosening its "modestly restrictive" grip on the economy.

At the same time, Thursday's economic reports, led by the U.S. personal consumption expenditures (PCE) price index overall, the Fed's preferred gauge of inflation, supported the U.S. central bank's patient stance in cutting interest rates. U.S. jobless claims were also better than forecast, suggesting that the labor market was not falling off a cliff. Treasury yields showed little reaction to the numbers.

Following Powell's remarks and the data, federal funds futures, which are tied to the U.S. central bank's monetary policy, have priced in just a 40% chance of easing in September, compared with 65% before the Fed statement on Wednesday, according to the CME's FedWatch. U.S. rate futures also reduced the expected pace of easing this year to just 34 bps. That was 44 bps before the Fed decision.

"It's really now just all about waiting for nonfarm payrolls tomorrow. And while the market might be pricing out the odds of a cut in September following Powell's comments, it clearly remains comfortable with the idea that rate cuts are a matter of when, not if," said Zachary Griffiths, head of investment-grade and macro strategy at CreditSights in Charlotte, North Carolina.

"And so it has been interesting. I feel like despite all of the macro volatility and intense focus on the data, we've really been in a fairly tight range recently with, let's say the 10-year anchored around 4.4%, give or take a handful of basis points."

In late morning trading, U.S. 10-year yields were last down 3.8 basis points (bps) at 4.340% US10YT=RR, but up 11 bps on the month. Similarly, the two-year yield, which reflects interest rate expectations, slipped 1.7 bps to 3.92% US2YT=RR. It was up 20 bps so far for the month of July.

U.S. 30-year yields were also lower on the day, down 4.8 bps at 4.865%, but up 9 bps this month US30YT=RR.

Treasury yields briefly pared declines after the economic data. The personal consumption expenditures (PCE) price index rose 0.3% last month after an upwardly revised 0.2% gain in May, the data showed. Economists polled by Reuters had forecast the PCE price index climbing 0.3% following a previously reported 0.1% rise in May. In the 12 months through June, the PCE price index advanced 2.6% after increasing 2.4% in May.

A separate report showed the number of Americans filing new applications for unemployment benefits increased marginally last week, suggesting that the labor market remained stable, though it is taking longer for laid-off workers to find new opportunities. Initial claims for state unemployment benefits rose by 1,000 to a seasonally adjusted 218,000 for the week ended July 26, data showed. Economists polled by Reuters had forecast 224,000 claims for the latest week.

Investors are now looking to Friday's employment report, with Wall Street economists forecasting new jobs created at 110,000, down from 147,000 in June. The unemployment rate is seen edging up to 4.2% in July from 4.1% in the previous month.