TREASURIES-US yields rise as bond rally pauses, weak jobs news reinforces rate outlook

By Alden Bentley

NEW YORK, Sept 9 (Reuters) - U.S. Treasury yields rose on Tuesday as a long-end bond rally abated, while a downward revision in benchmark jobs data validated a weakening labor market outlook that was already making a case for several Federal Reserve rate cuts this year.

Benchmark yields initially pared gains after the Labor Department said the U.S. economy likely created 911,000 fewer jobs in the 12 months through March than previously estimated. Economists had expected the revision to be in a range between 400,000 and 1 million jobs.

The jobs news suggested that job growth was already stalling before President Donald Trump's aggressive tariffs on imports.

A weak nonfarm payrolls report last week showed a gain of only 22,000 jobs in August, which lifted bond prices and sent the 10-year and 30-year yields to their lowest levels since April and May, respectively.

Signs of labor market weakness have all but guaranteed that the Fed will cut rates for the first time since December at its September 16-17 meeting. The question now is how much it will cut by, and how aggressively it will act 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.

"Certainly the Fed is already geared to cut rates based on weaker jobs, the job situation as a whole. This does nothing to dissuade the Fed from moving 25 basis points," said Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest in Chicago.

Michael Contopoulos, Deputy CIO at Richard Bernstein Advisors, said that the last time the Fed cut rates into a profit acceleration was September 2022, which was followed by a 120 bp rise in the 10-year yield and a plummet in the equity market.

"Rate cuts only help markets if they fall below neutral (and are stimulative) or coincide with strong earnings growth AND low inflation," he wrote in a client note on Tuesday. "Neither is likely in the coming months."

Markets are fully pricing in a cut of at least 25 basis points next week, with expectations for an outsized 50-basis-point cut at about 8%, according to CME Group's FedWatch Tool.

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

A Treasury auction of $58 billion of three-year notes saw strong demand on Tuesday. The market is mostly focused on investor interest in the long end and will gauge that at Wednesday's 10-year note and, especially, Thursday's 30-year bond auctions.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 2.8 basis points to 4.074% after briefly hitting a session low of 4.04% after the revised jobs data.

The yield on the 30-year bond US30YT=TWEB climbed 2.8 basis points to 4.727%.

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 52.8 basis points.

The three-year yield ticked lower after the auction and was wrapping up trading up 3.8 basis points at 3.501%.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, gained 4.9 basis points to 3.544%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.454% after closing at 2.439% on September 8.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.365%, indicating the market sees inflation averaging under 2.4% a year for the next decade.