TREASURIES-US yields tumble after weaker than expected payrolls data

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 1 (Reuters) - U.S. Treasury yields plunged after data showed on Friday the world's largest economy created fewer jobs than expected in July, increasing the odds that the Federal Reserve will resume cutting interest rates at its September meeting.

U.S. two-year yields, which are tied to the Fed's monetary policy, dropped 17 basis points (bps) to 3.811% US2YT=RR, on track for its largest daily fall since April.

The benchmark 10-year yield slid 9.3 bps to 4.267% US10YT=RR.

U.S. job growth slowed more than expected last month while June's data was revised sharply lower, pointing to a sharp moderation in the labor market.

Nonfarm payrolls increased by 73,000 jobs last month after rising by a downwardly revised 14,000 in June, data showed. Economists polled by Reuters had forecast payrolls increasing by 110,000 jobs after rising by a previously reported 147,000 in June. May was also revised downward.

The unemployment rate rose to 4.2% from 4.1% in June.

"The downward revisions were the most revealing in this month's job report," said Jeffrey Roach, chief economist, at LPL Financial in emailed comments.

"Given the weakness, investors will recalibrate rate expectations. This solidifies our view that the Fed could cut rates in September."

Following the jobs data, U.S. rate futures have now priced in a 67% chance that the Fed will cut rates in September, according to the CME's FedWatch. That was just 38% late Thursday.

Rate futures have also factored 53 basis points (bps) of easing this year, compared with just 39 bps of rate declines on Thursday.