TREASURIES-US yields drop as unemployment rises in September

By Karen Brettell

NEW YORK, Nov 20 (Reuters) - U.S. Treasury yields fell on Thursday after data showed that the U.S. unemployment rate rose in September even as employers added more jobs than economists had expected during the month, with traders now readjusting for the probability that a rate cut at the Federal Reserve’s December meeting may be a coin flip.

Nonfarm payrolls increased by 119,000 jobs in September. Economists polled by Reuters had forecast 50,000 jobs would be added. The unemployment rate rose to 4.4%, from 4.3% in August.

“Depending on your priors from the Fed, it probably gives both the hawks and the doves something to confirm what they thought,” said Jan Nevruzi, U.S. rates strategist at TD Securities in New York.

Treasuries rallied, however, with yields falling, as traders brought the pricing of a December rate cut back closer to 50-50, he said.

Traders have repriced for falling odds of a December rate cut in the past week as many Fed policymakers express concerns about further easing due to still elevated inflation.

Fed funds futures traders are now pricing in a 33% chance of a December rate cut, up from 27% on Wednesday, according to data by LSEG.

The 2-year note US2YT=RR yield, which typically moves in step with Fed rate expectations, was last down 2.8 basis points on the day at 3.571%. The yield on benchmark U.S. 10-year notes US10YT=RR fell 1.2 basis points to 4.119%.

The two-year, 10-year Treasury yield curve US2US10=RR steepened to 54.6 basis points.