TREASURIES-US yields sink as weak jobs report stokes bigger rate cut bets

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 5 (Reuters) - U.S. Treasury yields took a nosedive on Friday after data showed the world's largest economy created far fewer jobs than expected in August, reinforcing expectations the Federal Reserve will resume cutting interest rates at a policy meeting this month.

The rate futures market has now started to price in a 50 basis-point easing at the end of the two-day meeting on September 17.

In morning trading, U.S. two-year yields, which reflect interest rate expectations and the benchmark 10-year yield both fell to their lowest since April.

The two-year yield was last down 12.2 basis points (bps) at 3.47% US2YT=RR, while the benchmark 10-year yield sagged 11.3 bps to 4.062% US10YT=RR.

Data from the Bureau of Labor Statistics showed that U.S. nonfarm payrolls increased by only 22,000 jobs last month after rising by an upwardly revised 79,000 in July, the Labor Department said on Friday.

Economists polled by Reuters had forecast payrolls rising by 75,000 positions after a previously reported 73,000 gain in July.

"A 50 basis-point cut is back on the table," wrote Brian Jacobsen, chief economist, at Annex Wealth Management in emailed comments after the data.

"Everyone was probably more keyed-in on the revisions than the headline number. With revisions, there was nearly net zero job creation."

Data showed that in June, the U.S. economy lost 13,000 jobs instead of the initially reported 14,000 payrolls gain.

Following the data, the U.S. rate futures market has now priced a 12% chance that the Fed will cut by 50 bps later this month, and an 88% probability of the more standard 25 bp cut, according to LSEG calculations.

Traders have also priced in about 70 bps of easing this year, up from 59 bps on Thursday.

The Treasury yield curve, meanwhile, steepened following the jobs report, with the gap between two-year and 10-year yields widening to 59.6 bps US2US10=TWEB, compared with 57.1 bps late on Thursday. On Wednesday, the curve hit 63.8 bps, its widest spread since April.

The steeper curve suggested that traders are pricing an imminent rate cut from the Fed. But it also reflected inflation worries if the Fed cuts too aggressively, which have prompted investors to sell the long end of the curve.

In other maturities, the yield on U.S. 30-year bonds, the focus of an investor sell-off early this week, was down 8 bps at 4.794% US30YT=RR. On Wednesday, 30-year yields touched 5% for the first time since July.