TREASURIES-US Treasury yields dip as Fed rate cut bets rise

By Karen Brettell

NEW YORK, Nov 21 (Reuters) - U.S. Treasury yields fell to a three-week low on Friday as investors raised bets that the Federal Reserve will cut interest rates next month due to a weakening labor market.

Data on Thursday showed that the unemployment rate increased in September even as employers added more jobs than economists had expected during the month. The August payrolls data was also revised to show employers shedding jobs for the second time this year.

Stock market volatility and dovish comments from New York Fed President John Williams added to the move on Friday.

“The market is getting a little softer in terms of risk sentiment and there's been a little bit more in terms of uncertainty in the ultimate path of Fed policy,” said Zachary Griffiths, head of investment-grade and macro strategy at CreditSights in Charlotte.

For the jobs data, “the uptick in the unemployment rate and the revised down to negative job gains in August may have been the bigger market driver relative to the pretty notable upside surprise on the actual September print itself,” Griffiths said.

The federal government is catching up on data after reopening last week from a record 43-day shutdown.

Fed funds futures traders are now pricing in 73% odds of a December cut, up from 39% on Thursday, according to the CME Group's FedWatch Tool.

The 2-year note US2YT=RR yield, which typically moves in step with Fed rate expectations, was last down 4.8 basis points at 3.51%. The yield on benchmark U.S. 10-year notes US10YT=RR fell 3.7 basis points to 4.067%.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened to 55.5 basis points.

Bonds also got a boost after New York Fed's Williams said on Friday that the U.S. central bank can still cut interest rates "in the near term" without putting its inflation goal at risk.

Traders had reduced bets on a December rate cut after several Fed officials in the past two weeks indicated they were reticent to continue easing with inflation above the bank's 2% annual target.

“Our take after reading those was that on balance, there is still more labor market concern relative to inflation concern, but it's clearly a close call,” Griffiths said, adding that he expects the Fed to cut rates next month.

Boston Fed President Susan Collins said on Friday that monetary policy is in the right place amid a resilient economy.

Dallas Fed's Lorie Logan on Friday called for leaving the policy rate on hold "for a time" while the central bank assesses how much of a brake the current level of borrowing costs is putting on the economy.

Global brokerages are split over whether the Fed will cut interest rates in December or hold them.