TREASURIES-US yields ease off highs after data with auction eyed

By Chuck Mikolajczak

NEW YORK, Aug 7 (Reuters) - U.S. Treasury yields fell from their session highs on Thursday after data on the labor market and worker productivity did little to alter expectations for rate cuts from the Federal Reserve this year.

The Labor Department said weekly initial jobless claims rose 7,000 to a seasonally adjusted 226,000, the highest level since the week ended July 5 and slightly above the 221,000 estimate of economists polled by Reuters.

"From our perspective, it's a continuation of really the same theme, which is companies aren't aggressively hiring, but they're also not firing," said Bill Merz, head of capital markets research at U.S. Bank Asset Management Group in Minneapolis.

In addition, worker productivity increased 2.4% in the second quarter, above the 2.0% estimate, stemming a jump in labor costs at the start of the year, as unit labor cost growth came in at 1.6% after an upwardly revised 6.9% in the first quarter.

Yields have been moving lower in recent sessions, including a steep drop on Friday, following a weak government payrolls report and an announcement from the Fed that Governor Adriana Kugler was resigning early, which bolstered market expectations for a rate cut from the central bank at its September meeting.

"That one-time shift in rate cut odds and magnitude influenced the entire curve, and since then, we've been pretty stable... it was really about that Friday payroll report resetting expectations for rate cuts and therefore influencing Treasury yields across the curve," said Merz.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was up 0.1 basis point to 4.233% after earlier advancing to 4.25%.

Yields moved slightly higher after Bloomberg News reported Governor Christopher Waller is emerging as a top candidate to serve as the central bank's chair among President Trump's team, citing people familiar with the matter.

The yield on the 30-year bond US30YT=TWEB fell 1.6 basis points to 4.795%.

After weak auctions of $58 billion in three-year notes US3YT=RR and a $42 billion 10-year auction earlier this week, investors will eye a $25 billion 30-year auction later in the day.

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 50.1 basis points after hitting a fresh 2-1/2 week high of 55.1 on Wednesday.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with Fed interest rate expectations, advanced 2.5 basis points to 3.726% after earlier climbing to 3.732% on the session.

Atlanta Fed President Raphael Bostic on Thursday said his outlook was for the economy to continue slowing, but added there were many economic scenarios that could play out.

Market expectations for a September rate cut of at least 25 basis points from the Fed stood at 93.2%, down slightly from the 94.6% in the prior session and well above the 37.7% from a week ago, according to CME's FedWatch Tool.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.424% after closing at 2.418% on Wednesday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.362%, indicating the market sees inflation averaging about 2.4% a year for the next decade.