TREASURIES-Long-end yields continue post-payrolls decline, eyes on CPI ahead of FOMC

By Alden Bentley

NEW YORK, Sept 8 (Reuters) - The benchmark Treasury yield fell to a five-month low on Monday after Friday's bleak employment report boosted bonds and all but locked in at least a quarter-point easing next week, though traders awaited further confirmation from midweek inflation reports.

The yield on the 10-year note extended its decline to levels last seen in early April, while the 30-year yield hit its lowest since May 1. The two-year yield stayed inside Friday's range.

In the wake of the nonfarm payrolls report showing an increase of only 22,000 jobs in August, much lower than forecasts for 75,000 positions and an upwardly revised 79,000 in July, investors have played down the growth outlook and upgraded the odds for a Federal Reserve cut this month that would mark the first easing since December.

The U.S. economy lost 13,000 jobs in June instead of the initially reported gain of 14,000, the report showed.

The rate futures market sees zero chance that the Fed will stay on hold after next week's two-day meeting, even briefly pricing in after the jobs report as much as a 15% chance the 4.25%-4.50% Fed funds target would be slashed by 50 basis points, which has not been done since the first easing this cycle in September 2024.

The latest betting shows a 90% chance of a 25 basis-point cut and 10% of 50 bp.

Meanwhile, the market has two big inflation reports this week to fold into its Fed expectations: August's Producer Price Index on Wednesday, and more crucially its Consumer Price Index on Thursday.

"I can't see a 50 basis-point (cut) at this juncture. So I'm betting on 25 basis points," said Kim Rupert, managing director of fixed income at Action Economics in San Francisco.

"I think the structure of guidance is going to, again, depend a lot on CPI. If CPI is hot, then it's going to be a more wait-and-see kind of statement from (Fed Chair Jerome Powell) regarding future cuts," she said.

Also on the docket this week as important indicators of demand for Treasuries are a three-year note auction on Tuesday, a 10-year note auction on Wednesday and Treasury's sale of 30-year bonds on Thursday.

"We've gone past the 'sell America' kind of narrative, so I don't think that's going to be problematic," Rupert said. "Although it is interesting, there's still a lot of fiscal issues that are hitting Europe right now, so I think the U.S. will still be seen as a very good investment."

The 10-year yield US10YT=TWEB fell 4.0 basis points to 4.046%, near its lowest level since April 7.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 1.2 basis points to 3.495%.

The yield on the 30-year bond US30YT=TWEB fell 8.6 basis points to 4.688%, extending a sharp decline after last week's test of 5% drew a parade of T-bond buyers.

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 54.9 basis points, flatter than +56.3 bp late on Friday.

"What's remarkable about what's going on today in markets is that the long end is just seeing such elevated demand. The curve is flattening pretty aggressively," said Jan Nevruzi, U.S. rates strategist at TD Securities, New York.

"That's just more of a continuation of what we saw in the post-payrolls."

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.439% after closing at 2.452% on Friday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was 2.359%, indicating the market sees inflation averaging less than 2.4% a year, close to the Fed's 2% target, for the next decade.