TREASURIES-US yields tick higher, bond rally pauses before payrolls data revision

By Alden Bentley

NEW YORK, Sept 9 (Reuters) - U.S. Treasury yields rose on Tuesday as a long-end bond-buying frenzy abated, while markets waited for a benchmark revision to payrolls data as a worsening labor picture already has traders ramping up bets for more accelerated easing this year.

The government publishes its preliminary nonfarm payrolls benchmark estimate at 1000 EDT/1500 GMT, with economists forecasting the level of U.S. employment for the 12 months through March could be slashed by as many as one million jobs.

That will follow on the heels of a much-weaker-than-expected 22,000 increase in August nonfarm payrolls reported Friday, which lifted bond prices and sent the 10-year and 30-year yields to their lowest levels in several months.

"Analysts expect downward revisions of around 750k, which would imply monthly payrolls growth was 62.5k lower than currently reported, on average, over that period. There could be a lot of headlines and a decent market reaction, but the implications for near-term Fed policy or evaluating labor market health are limited," said Will Compernolle, macro strategist at FHN Financial in a client report.

It also all but guaranteed the Federal Open Market Committee will cut rates for the first time since December at next week's meeting. The question now is how much it will cut by and how aggressive it will be in the face of mounting evidence that its mandate to promote employment is shaping up as an equal challenge to its other imperative of controlling inflation.

In Tuesday futures trading, the probability of a 25 basis-point cut next Wednesday was 93% and a half-point reduction 7%, off post-payrolls peak odds of around 15%. The market sees at least 75 basis points being cut from the current 4.25%-4.50% fed funds target by year-end.

But traders are also reluctant to get too far ahead of themselves before Thursday's Consumer Price Index report, which if it comes in much hotter than the 0.3% expected by economists polled by Reuters and July's 0.2% rise could complicate the Fed's decision.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was up 1.9 basis points at 4.065%. The yield on the 30-year bond US30YT=TWEB rose 2.3 basis points to 4.713%.

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 54.2 basis points.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, rose 2.6 basis points to 3.521%.